<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------
FORM 10/A
AMENDMENT NO.1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
TCI Satellite Entertainment, Inc.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1352884
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(State of incorporation (I.R.S. Employer
or organization) Identification No.)
8085 South Chester, Suite 300
Englewood, Colorado 80112
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (303) 712-4600
--------------
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Series A Common Stock, $1.00 par value
--------------------------------------
(Title of class)
Series B Common Stock, $1.00 par value
--------------------------------------
(Title of class)
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TCI SATELLITE ENTERTAINMENT, INC.
INFORMATION INCLUDED IN INFORMATION STATEMENT
AND INCORPORATED IN FORM 10 BY REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
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ITEM ITEM CAPTION LOCATION IN INFORMATION STATEMENT
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NO.
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1. Business. SUMMARY; RISK FACTORS; THE DISTRIBUTION -- Reasons for
the Distribution; THE DISTRIBUTION -- Certain
Consequences of the Distribution; ARRANGEMENTS BETWEEN
TCI AND THE COMPANY AFTER THE DISTRIBUTION; BUSINESS OF
THE COMPANY; MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
2. Financial Information. SUMMARY; RISK FACTORS; SELECTED FINANCIAL DATA;
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS; FINANCIAL
STATEMENTS.
3. Properties. BUSINESS OF THE COMPANY -- Properties.
4. Security Ownership of RISK FACTORS -- Disparate Voting Rights; Substantial
Certain Beneficial Stockholders; MANAGEMENT OF THE COMPANY -- Stock
Owners and Management. Ownership of Management; PRINCIPAL STOCKHOLDERS OF THE
COMPANY.
5. Directors and Executive MANAGEMENT OF THE COMPANY; DESCRIPTION OF COMPANY
Officers. CAPITAL STOCK -- Limitation on Directors' Liability;
Indemnification.
6. Executive Compensation. MANAGEMENT OF THE COMPANY.
7. Certain Relationships SUMMARY; RISK FACTORS -- Relationship with TCI;
and Related Transactions. RISK FACTORS -- Potential Conflicts of Interest
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<TABLE>
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ARRANGEMENTS BETWEEN TCI AND THE
COMPANY AFTER THE DISTRIBUTION; THE
DISTRIBUTION; MANAGEMENT OF THE COMPANY.
8. Legal Proceedings. BUSINESS OF THE COMPANY -- Legal Proceedings.
9. Market Price of and Dividends on the Registrant's SUMMARY; RISK FACTORS -- Dividends and
Common Equity and Related Stockholder Matters. Dividend Policy; RISK FACTORS -- Absence of
Prior Trading Market; THE DISTRIBUTION;
DESCRIPTION OF COMPANY CAPITAL STOCK.
10. Recent Sales of Unregistered Securities. Not Applicable.
11. Description of Registrant's Securities to be Registered. RISK FACTORS -- Potential Antitakeover
Provisions; DESCRIPTION OF COMPANY CAPITAL
STOCK.
12. Indemnification of Directors and Officers. DESCRIPTION OF COMPANY CAPITAL STOCK --
Limitation on Directors' Liability;
Indemnification.
13. Financial Statements and Supplementary Data. SUMMARY; RISK FACTORS; SELECTED FINANCIAL
DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS; FINANCIAL STATEMENTS.
14. Changes in and Disagreements with Accountants on Not Applicable.
Accounting and Financial Disclosure.
15. Financial Statements and Exhibits. FINANCIAL STATEMENTS; EXHIBIT INDEX.
</TABLE>
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TELE-COMMUNICATIONS, INC.
TERRACE TOWER II
5619 DTC PARKWAY
ENGLEWOOD, COLORADO 80111-3000
Dear Fellow Shareholder:
The Board of Directors of Tele-Communications, Inc. ("TCI") has declared a
distribution (the "Distribution") by TCI to holders of its TCI Group Common
Stock (as defined below) of shares of the Series A Common Stock, $1.00 par
value per share (the "Series A Common Stock"), and the Series B Common Stock,
$1.00 par value per share (the "Series B Common Stock" and, together with the
Series A Common Stock, the "Company Common Stock"), of TCI Satellite
Entertainment, Inc. (the "Company"), a wholly owned subsidiary of TCI. The
Distribution will occur on , 1996 (the "Distribution Date") and will be
made as a dividend to holders of record at the close of business on ,
1996 (the "Record Date") of shares of Tele-Communications, Inc. Series A TCI
Group Common Stock, $1.00 par value per share (the "Series A TCI Group Common
Stock") and Tele-Communications, Inc. Series B TCI Group Common Stock, $1.00
par value per share (the "Series B TCI Group Common Stock" and, together with
the Series A TCI Group Common Stock, the "TCI Group Common Stock").
If you are a stockholder of record of TCI Group Common Stock on the Record
Date, you will receive one share of Series A Common Stock for each ten shares
of Series A TCI Group Common Stock owned by you of record at the close of
business on the Record Date and one share of Series B Common Stock for each
ten shares of Series B TCI Group Common Stock owned by you of record as of the
close of business on the Record Date. Fractional shares will not be issued.
Fractions of one-half or greater of a share will be rounded up and fractions
of less than one-half of a share will be rounded down to the nearest whole
number of shares of Series A Common Stock and Series B Common Stock. You will
receive your stock certificate or certificates for Company Common Stock in a
separate mailing shortly after the Distribution Date.
The Distribution will not affect the number of shares of Series A TCI Group
Common Stock and Series B TCI Group Common Stock that you hold, and does not
require any payment or other action by you. No vote of TCI's shareholders is
required to effect the Distribution and proxies are not being solicited.
The attached Information Statement, which is being distributed to all
holders of TCI Group Common Stock in connection with the Distribution,
contains information concerning the Distribution, the business of the Company
and certain effects of the divestiture of the Company through the
Distribution. You are urged to examine this document carefully and to retain
it for future reference.
The shares of Series A Common Stock and Series B Common Stock to be
distributed are expected to be approved for listing on the Nasdaq National
Market under the symbols "TSAT A" and "TSAT B", respectively.
Any questions you may have concerning the Distribution may be addressed to
Investor Relations, Tele-Communications, Inc., P.O. Box 5630, Denver, Colorado
80217; telephone (303) 267-5051.
Sincerely,
Bob Magness Chairman of the Board
John C. Malone Chief Executive
Officer
Englewood, Colorado
, 1996
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
8085 SOUTH CHESTER, SUITE 300
ENGLEWOOD, COLORADO 80112
November , 1996
Dear Shareholder:
I am pleased to welcome you as a shareholder of TCI Satellite Entertainment,
Inc. (the "Company"), a new Company formed to operate the digital satellite
programming distribution business formerly operated as part of the TCI Group
of Tele-Communications, Inc. ("TCI").
While we are a new public Company, we are actually one of the pioneers in
the satellite to home business. Our Company and its predecessor entities began
operations back in 1990, as a distributor of the PRIMESTAR Partners, L.P.
("PRIMESTAR Partners") programming service. PRIMESTAR (R), at that time, was
an analog service, limited to seven broadcast television superstations, TV
Japan and three pay-per-view stations, and was offered in an effort to serve
customers in rural areas unable to obtain cable television service. In 1994,
PRIMESTAR Partners was among the first digital video to home satellite
providers.
Over the years, both technology and content have improved dramatically. Our
PRIMESTAR By TCI service offers over 90 channels of digital programming with
superb picture quality. As a result, the demand for satellite to home services
has expanded beyond the rural marketplace. Today, your Company serves
approximately 20 percent of a 3.5 million subscriber industry.
Through PRIMESTAR Partners, your Company's partnership with six other
companies, the Company expects to broadcast over two new satellites in 1997.
This will increase our digital channel offerings to over 140 and reduce the
receive dish size down to below 30 inches.
The digital satellite television industry is a very competitive and fast
growing industry. The future holds many challenges and opportunities for us.
We hope you participate in this exciting future with us.
Sincerely,
Gary S. Howard
President and Chief Executive
Officer
<PAGE>
INFORMATION STATEMENT
TCI SATELLITE ENTERTAINMENT, INC.
8085 SOUTH CHESTER, SUITE 300
ENGLEWOOD, COLORADO 80112
(303) 712-4600
This Information Statement is being furnished by Tele-Communications, Inc.,
a Delaware corporation ("TCI"), in connection with the distribution (the
"Distribution") by TCI to the holders of record of shares of Tele-
Communications, Inc. Series A TCI Group Common Stock, $1.00 par value per
share (the "Series A TCI Group Common Stock"), and to the holders of record of
shares of Tele-Communications, Inc. Series B TCI Group Common Stock, $1.00 par
value per share (the "Series B TCI Group Common Stock" and, together with the
Series A TCI Group Common Stock, the "TCI Group Common Stock"), of all the
issued and outstanding common stock (the "Company Common Stock") of TCI
Satellite Entertainment, Inc., a Delaware corporation and a wholly owned
subsidiary of TCI (the "Company"). The Distribution will be made on ,
1996 (the "Distribution Date") as a dividend to the holders of record of TCI
Group Common Stock (such holders, the "TCI Group Stockholders") at the close
of business on , 1996 (the "Record Date"), on the basis of one share of
the Company's Series A Common Stock, $1.00 par value per share (the "Series A
Common Stock"), for each ten shares of Series A TCI Group Common Stock held of
record on the Record Date, and one share of the Company's Series B Common
Stock, $1.00 par value per share (the "Series B Common Stock"), for each ten
shares of Series B TCI Group Common Stock held of record on the Record Date.
No certificates or scrip representing fractional shares of Series A Common
Stock or Series B Common Stock will be issued. Fractions of one-half or
greater of a share will be rounded up and fractions of less than one-half of a
share will be rounded down to the nearest whole number of shares of Series A
Common Stock or Series B Common Stock.
The TCI Group Stockholders will not be required to pay any consideration for
the shares of Company Common Stock they receive in the Distribution. There is
no current public trading market for the Company Common Stock. The shares of
Series A Common Stock and Series B Common Stock to be distributed are expected
to be approved for listing on the Nasdaq National Market upon issuance under
the symbols "TSAT A" and "TSAT B," respectively.
In connection with the Distribution, TCI will cause to be transferred to the
Company and its subsidiaries certain assets and businesses (and the related
liabilities) constituting all of TCI's interests in the business of
distributing multichannel programming services directly to consumers in the
United States via digital medium power or high power satellite, including the
rental and sale of customer premises equipment relating thereto (the "Digital
Satellite Business").
In reviewing this Information Statement, stockholders should carefully
consider the matters described under the heading "Risk Factors" beginning on
p. 15.
THIS INFORMATION STATEMENT CONTAINS MANY FORWARD-LOOKING STATEMENTS ABOUT
BUSINESS STRATEGIES, MARKET POTENTIAL, FUTURE FINANCIAL PERFORMANCE, NEW
SERVICE LAUNCHES AND OTHER MATTERS. SUCH STATEMENTS INVOLVE MANY RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH
STATEMENTS, INCLUDING, WITHOUT LIMITATION, THOSE RISKS AND UNCERTAINTIES
DESCRIBED UNDER THE HEADING "RISK FACTORS," BEGINNING ON P. 15.
---------------
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION. WE
ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
---------------
THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------
THE DATE OF THIS INFORMATION STATEMENT IS , 1996.
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form 10 (including exhibits, schedules and
amendments thereto, the "Company Form 10") pursuant to the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), with respect to the Company
Common Stock. This Information Statement, while forming a part of the Company
Form 10, does not contain all of the information set forth in the Company Form
10. Reference is hereby made to the Company Form 10 for further information
with respect to the Company and the securities to be distributed to the TCI
Group Stockholders in the Distribution. Statements contained herein concerning
the provisions of documents filed as exhibits to the Company Form 10 are
necessarily summaries of such documents, and each such statement is qualified
in its entirety by reference to the copy of the applicable document filed with
the SEC.
The Company Form 10 is available for inspection and copying at the public
reference facilities maintained by the SEC at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, as well as at the Regional Offices of the SEC at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such information can be obtained by mail from the Public Reference
Branch of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The SEC also maintains a Web site that contains information
regarding registrants (including the Company) that file electronically with
the SEC. The address of the SEC's Web site is http://www.sec.gov.
Following the Distribution, the Company will be subject to the informational
requirements of the Exchange Act, and, in accordance therewith, will file
reports, proxy statements and other information with the SEC that will be
available for inspection and copying at the SEC's public reference facilities
referred to above. Copies of such material can be obtained by mail at
prescribed rates by writing to the Public Reference Branch of the SEC at the
address referred to above. In addition, it is expected that reports, proxy
statements and other information concerning the Company will be available for
inspection at the Nasdaq Stock Market, 1735 K Street, N.W., Washington D.C.
20006.
Questions concerning the Distribution should be directed to Investor
Relations, Tele-Communications, Inc., P.O. Box 5630, Denver, Colorado 80217;
telephone (303) 267-5051. After the Distribution, holders of Company Common
Stock having inquiries related to their investment in the Company should
contact Investor Relations, TCI Satellite Entertainment, Inc., 8085 South
Chester, Suite 300, Englewood, Colorado 80112, (303) 712-4600.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION STATEMENT, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED.
2
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ADDITIONAL INFORMATION................................................... 2
SUMMARY.................................................................. 4
ORGANIZATION OF THE COMPANY.............................................. 14
RISK FACTORS............................................................. 15
THE DISTRIBUTION......................................................... 25
ARRANGEMENTS BETWEEN TCI AND THE COMPANY AFTER THE DISTRIBUTION.......... 30
CAPITALIZATION........................................................... 35
SELECTED FINANCIAL DATA.................................................. 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 37
BUSINESS OF THE COMPANY.................................................. 46
REGULATORY MATTERS....................................................... 70
MANAGEMENT OF THE COMPANY................................................ 74
PRINCIPAL STOCKHOLDERS OF THE COMPANY.................................... 87
DESCRIPTION OF COMPANY CAPITAL STOCK..................................... 89
INDEPENDENT AUDITORS..................................................... 97
GLOSSARY OF TERMS........................................................ 98
FINANCIAL STATEMENTS..................................................... F-1
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3
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including financial statements, appearing elsewhere in this
Information Statement. For definitions of certain terms used in the satellite
industry and this Information Statement, see "Glossary of Terms."
THE COMPANY
The Company was formed in connection with the Distribution to own and operate
certain businesses of the TCI Group, defined below, constituting all of the TCI
Group's interests in the Digital Satellite Business. At the time of the
Distribution, TCI will cause to be transferred to the Company and its
subsidiaries the ownership interests in (i) TCI's business of distributing the
PRIMESTAR(R) programming service ("PRIMESTAR(R)"), known as PRIMESTAR By TCI,
which, as of June 30, 1996, had an installed base of approximately 659,000
Authorized Units, (ii) an aggregate 20.86% partnership interest in PRIMESTAR
Partners, L.P. ("PRIMESTAR Partners" or the "Partnership"), (iii) Tempo
Satellite, Inc. ("Tempo"), which holds TCI's high power satellite interests,
and (iv) TCI's rights under certain agreements with Telesat Canada, a Canadian
corporation ("Telesat"). See "Business of the Company." References in this
Information Statement to "Authorized Units" refer to the number of active
authorized satellite receivers, more than one of which may be installed in a
subscribing household.
The Company was incorporated in Delaware in June 1996 and at the time of the
Distribution will be a wholly owned subsidiary of TCI. The principal executive
office of the Company is at 8085 South Chester, Suite 300, Englewood, Colorado
80112. Its telephone number is (303) 712-4600.
Unless the context otherwise requires, references in this Information
Statement to "the Company" refer to (i) TCI's collective interests in the
Digital Satellite Business (as described above) before the Distribution Date
and (ii) the Company and its consolidated subsidiaries on and after the
Distribution Date. Additionally, references in this Information Statement to
"TCI" include TCI's consolidated subsidiaries unless the context indicates
otherwise. References to TCI prior to August 4, 1994, refer to TCI's
predecessor.
PRIMESTAR(R)
PRIMESTAR Partners was formed by subsidiaries of TCI, several other cable
operators and General Electric Company ("G.E.") in February 1990, under the
name K Prime Partners, L.P., to acquire, originate and/or provide television
programming services for delivery by satellite (at Ku-band or higher
frequencies) to subscribers in the continental U.S. In 1994 PRIMESTAR Partners
was among the first satellite television providers to use digital compression
technology for superior delivery of picture and sound. PRIMESTAR Partners
currently provides 94 channels of entertainment programming throughout the
continental U.S., via medium power satellite, to home satellite dishes
("dishes" or "HSDs") approximately 36 inches in diameter. During the first
quarter of 1997, subject to the successful launch and operation of a new
satellite, GE-2 (described below), PRIMESTAR Partners will have the capacity to
increase its offering to about 140 channels of programming while reducing its
dish size to approximately 29 inches for subscribers in the majority of the
U.S. See "Business of the Company--PRIMESTAR By TCI--The PRIMESTAR Service."
The PRIMESTAR(R) service is currently broadcast from Satcom K-1 ("K-1"), a
medium power satellite located at the 85(degrees) West Longitude ("W.L.")
orbital position that was launched in January 1986 and is nearing the end of
its normal useful life. K-1 is ultimately expected to be replaced by GE-2 ("GE-
2"), a medium power satellite that is currently scheduled to be launched on
January 31, 1997 and to be operational within 60 days after launch. In November
1996, pending the availability of GE-2, K-1 will be replaced by another medium
4
<PAGE>
power satellite, Satcom K-2 ("K-2"), which is currently located at 81(degrees)
W.L. and will be moved to 85(degrees) W.L. K-2 is expected to begin inclined
orbit operations in January 1997, however, and if a replacement satellite is
not available, PRIMESTAR(R) subscribers could begin to experience unacceptable
outage levels in the month of June 1997. Thus, a delay in the availability of
GE-2 could result in a material adverse effect on PRIMESTAR Partners and the
Company. If GE-2 suffers a launch failure, another communications satellite,
denominated GE-3 ("GE-3"), which is currently expected to be available for
launch in the summer of 1997, will be launched to replace GE-2. Each of K-1, K-
2, GE-2 and GE-3 is owned by GE American Communications, Inc. ("GE Americom"),
which is a subsidiary of G.E. and the parent company of G.E. Americom Services,
Inc. ("GEAS"), a partner of PRIMESTAR Partners. See "Risk Factors--Risks of
Failure of Delay in Launch of GE-2--Risks of Satellite Defect, Loss or Reduced
Performance" and "Risk Factors--Risks of Failure of Delay in Launch of GE-2--
Risk of Inclined Orbit Operations".
The PRIMESTAR(R) service is distributed through distributors
("Distributors"), all of which are affiliated with the Partnership's partners
other than G.E. The Partnership's Distributors operate in non-exclusive
territories assigned by PRIMESTAR Partners' management, which territories
generally comprise, among other areas, areas in and around localities in which
affiliates of such Distributors have cable television franchises. TCI, through
various subsidiaries, has been engaged in the business of distributing
PRIMESTAR(R) since December 1990. The Company's predecessor was incorporated in
February 1995 to consolidate TCI's PRIMESTAR(R) distribution business in one
subsidiary, and will be merged into the Company in connection with the
Distribution.
TEMPO
The Company is pursuing various alternative strategies to participate in the
high power segment of the digital satellite industry. The Company, through
Tempo, holds a construction permit issued by the Federal Communications
Commission ("FCC"), authorizing construction of a high power direct broadcast
satellite ("DBS") system consisting of two or more satellites delivering DBS
service in 11 frequencies at the 119(degrees) W.L. orbital position and 11
frequencies at the 166(degrees) W.L. orbital position (the "Construction
Permit"). Tempo is also a party to a satellite construction agreement with
Space Systems/Loral, Inc. ("Loral"), dated as of February 22, 1990 (the
"Satellite Construction Agreement"), pursuant to which Tempo has agreed to
purchase two high power direct broadcast satellites (each, a "Company
Satellite" and together, the "Company Satellites") and has an option to
purchase up to three additional satellites. See "Business of the Company--High
Power Satellites."
Subject to American and Canadian regulatory approvals, Tempo entered into an
arrangement with Telesat in May 1996 to launch one or both of the Company
Satellites into the 82(degrees) W.L. orbital position, a high power direct
broadcast satellite slot allocated by international agreement to Canada (the
"Telesat Transaction"). The Telesat Transaction, if consummated, provides that
(i) Tempo will sell the Company Satellites to Telesat and (ii) Telesat will
simultaneously resell 27 of the 32 transponders on the Company Satellites to a
subsidiary of the Company. See "Business of the Company--High Power
Satellites--Telesat Transaction." No assurance can be given that the regulatory
approvals necessary for the Telesat Transaction will be obtained or will be
obtained on terms satisfactory to the Company. See "Risk Factors--Risks of
Adverse Government Regulations and Adjudications--Telesat."
Subject to completion of the Telesat Transaction, the Company has exercised
its option under the Satellite Construction Agreement to purchase a third
satellite ("Satellite No. 3"), which, if the Telesat Transaction is completed,
would be designated for deployment in the 119(degrees) W.L. orbital position.
If the Telesat Transaction is not consummated, Tempo currently intends to
deploy one of the Company Satellites into 119(degrees) W.L.
If the Telesat Transaction is consummated, it is expected that PRIMESTAR
Partners will purchase or lease 100% of the capacity of the 27 transponders to
be repurchased from Telesat. If the Telesat Transaction is not consummated, it
is expected that PRIMESTAR Partners will purchase or lease 100% of the capacity
of the Company Satellite to be deployed at 119(degrees) W.L. See "Business of
the Company--High Power Satellites--Tempo Option".
5
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STRATEGY
The Company's primary objectives are to maintain its position in the market
as one of the premier providers of satellite delivered entertainment
programming and to become one of the major providers of informational services
to the home and business. It is expected that the Company's strategy will be
achieved as follows:
High Quality Programming. The Company offers consumers the PRIMESTAR(R)
service, which consists of a wide variety of high quality programming,
delivered digitally for laser-disc quality image and compact-disc quality
sound, for a competitive price. The Company believes that the image and sound
quality of the PRIMESTAR(R) service is superior to that provided by most
existing cable systems and wireless cable providers, which transmit analog
signals to their subscribers, and is comparable to that of other digital
satellite television providers, including those using compression methods based
on the MPEG-2 digital compression architecture. The Company further believes
that its combination of price and services provides consumers with greater
value than the respective price and service offerings of other current digital
satellite service providers. In addition, when GE-2 (or its replacement, GE-3)
is successfully launched and begins commercial operation, PRIMESTAR(R) will
increase its channel offerings from 94 video and audio channels to over 140
channel offerings, while reducing its dish size from 36 inches to approximately
29 inches for subscribers in the majority of the U.S. See "Business of the
Company--PRIMESTAR By TCI--The PRIMESTAR(R) Service," "Risk Factors--Risks of
Failure or Delay in Launch of GE-2--Risks of Satellite Defect, Loss or Reduced
Performance" and "Risk Factors--Risks of Failure or Delay in Launch of GE-2--
Risk of Inclined Orbit Operations."
Continued Subscriber Growth. The Company continues to grow its substantial
customer base through its multiple sales and distribution channels, which
include master sales agents and their sub-agents, direct sales representatives,
telemarketing, cable system operators and consumer retail outlets. The Company
recently began to distribute its services through Radio Shack, one of the
nation's largest consumer electronics retailers. In February 1996, PRIMESTAR
Partners entered into a national agreement with Radio Shack under which
PRIMESTAR(R) is expected to be sold through more than 6,500 Radio Shack stores
nationwide. As of October 1996, PRIMESTAR(R) is available for sale in
approximately 2,200 Radio Shack stores located in the Company's authorized
distribution territories, and the Company estimates that when the arrangement
is fully implemented, PRIMESTAR(R) will be available for sale in over 2,500
such stores. In addition, the Company supports its multiple distribution
channels with a wide variety of advertising, marketing and promotional
activities. See "Business of the Company--PRIMESTAR By TCI--Distribution" and
"Business of the Company--PRIMESTAR By TCI--Marketing."
Differentiating the Company's Offerings Through Superior Customer
Service. The Company believes that providing outstanding service, convenience
and value is essential in developing long term customer relationships. The
Company offers consumers a "one-stop shopping" service which includes
programming, installation, maintenance, reliable customer service and satellite
reception equipment. The Company maintains its own national call center
("National Call Center"), providing customers with round-the-clock telephone
support for sales, installation, authorization and billing, as well as to
schedule repair and customer service calls, 365 days per year. See "Business of
the Company--PRIMESTAR By TCI--Distribution."
Providing Consumers Attractive Alternatives to Obtain Equipment. The
Company's equipment rental program, which includes free maintenance and repair,
provides significant benefits to customers, who are not required to buy
satellite equipment in order to receive the PRIMESTAR(R) service. Because
PRIMESTAR By TCI is marketed as a service, with programming, equipment rental,
maintenance and 24-hour customer service included in the monthly charge, the
up-front costs to new subscribers of PRIMESTAR By TCI are generally lower than
the up-front costs to new subscribers of the Company's competitors, who must
typically purchase and install HSDs, satellite receivers and related equipment.
Moreover, since the Company generally owns, services and installs all customer
premises equipment for its rental customers, the Company protects its
subscribers from the inconvenience of equipment failure, maintenance concerns,
obsolete technology, self-installation and expired warranties. In addition, the
Company recently began offering consumers several options
6
<PAGE>
for purchasing, rather than renting, the necessary equipment, and intends to
implement a consumer financing program in late 1996 through an independent
financial institution. See "Business of the Company--PRIMESTAR By TCI--
Equipment and Installation."
Expanding Commercial Opportunities For Digital Satellite Services. The
Company believes that the commercial marketplace (i.e., hotels, motels, bars,
restaurants, multiple dwelling units, businesses and schools) (the "Commercial
Market") offers a substantial opportunity for growth and is therefore of
strategic importance. With an enhanced channel capacity in its audio and video
entertainment programming, subject to the successful launch and operation of
GE-2 (or its replacement, GE-3), the Company anticipates having the ability to
successfully penetrate the Commercial Market. The Company also intends to
pursue opportunities to provide private network service to businesses, and to
participate in the growing market for distance learning. In that connection,
the Company is exploring opportunities to work together with At Home
Corporation, a joint venture among TCI, Kleiner Perkins Caufield & Byers,
Comcast Corporation ("Comcast") and Cox Communications, Inc. ("Cox"), to
deliver Internet content to personal computers, and ETC w/tci, Inc., a
majority-owned subsidiary of TCI, formed to develop and distribute content and
technology applications for education, training and communications, as well as
other Internet and educational content providers.
Strategic Marketing Alliances. The Company intends to broaden its product and
service offerings to further complement its existing video service offerings by
forming alliances with strategic partners, such as its existing non-exclusive
relationships with Bose Corporation ("Bose") and Apple Computer, Inc.
("Apple"). See "Business of the Company--PRIMESTAR By TCI--Marketing." The
Company believes that such alliances can be important not only to expand the
market awareness of the Company's name and service offerings, but also to
increase the Company's potential market by expanding the scope of the use of
its product and services.
Focusing on Customers Currently Underserved by Multichannel Programming. The
Company seeks to maximize penetration in the "underserved" marketplace, defined
by the Company as those areas not passed by cable, or served by cable systems
with fewer than 40 channels. To date, the Company's primary market focus has
been the rural market, which is underserved for variety, choice and convenience
in audio and video entertainment programming. With the successful launch of GE-
2 (or its replacement, GE-3), the Company also intends to pursue subscriber
growth in the more urban and suburban markets within its territories.
High Power Opportunities. The Company continues to assess strategies for
delivering high power digital satellite signals to the consumer's home. The
Company's ultimate strategy could include one or a combination of the following
options: (i) implementing a high power DBS system at 82(degrees) W.L. pursuant
to the proposed Telesat Transaction, (ii) implementing a high power DBS system
at 119(degrees) W.L. under its Construction Permit, either as a limited service
complementary to off-the-air television, basic cable and other programming
services, or, subject to future advances in digital channel compression, as a
full-service, stand-alone offering, and (iii) securing additional spectrum
capacity through any new opportunities that may arise. These strategic options
may provide the Company the ability to complement or effectively upgrade its
current service. The Company is currently evaluating the viability and
attractiveness of each of the foregoing options from a regulatory, economic and
technological perspective.
THE DISTRIBUTION
DESCRIPTION OF THE DISTRIBUTION
TCI's Board of Directors (the "TCI Board") has declared a distribution of all
of the shares of Company Common Stock held by TCI to the TCI Group Stockholders
of record at the close of business on the Record Date, without any
consideration being paid by such holders, on the basis of one share of Series A
Common Stock for each ten shares of Series A TCI Group Common Stock, and one
share of Series B Common Stock for each ten shares of Series B TCI Group Common
Stock held by such holders on the Record Date. See "The
7
<PAGE>
Distribution--Description of the Distribution." TCI has two other series of
common stock outstanding--the Tele-Communications, Inc. Series A Liberty Media
Group Common Stock, $1.00 par value per share, and the Tele-Communications,
Inc. Series B Liberty Media Group Common Stock, $1.00 par value per share
(collectively, the "Liberty Media Group Common Stock"). The Liberty Media Group
Common Stock is intended to reflect the separate performance of TCI's
programming and electronic retailing businesses (the "Liberty Media Group").
Prior to the Distribution, the Company was a member of the group of TCI
businesses not attributed to the Liberty Media Group (the "TCI Group") and all
of the assets and businesses transferred to the Company were included in the
TCI Group. Accordingly, the Distribution is being made to the TCI Group
Stockholders and the holders of Liberty Media Group Common Stock will not
participate in the Distribution.
REASONS FOR THE DISTRIBUTION
The Distribution has been designed to separate the TCI Group's interests in
the cable distribution business from its interests in the Digital Satellite
Business--two businesses that use distinct distribution networks to provide
entertainment and other programming potentially to the same customer.
The separation of the TCI Group's Digital Satellite Business from its cable
business and the Company's status as a separate public company will enable
investors to evaluate better the merits and outlook of the Company's business.
TCI's management believes that, because of the relative size of the assets and
business of the Company compared to that of the TCI Group as a whole, the value
of the Company is largely overlooked by the investment community. By separating
the Company from TCI and allowing the market to establish a separate valuation
for the Company, the Distribution should, in management's opinion, result in an
increase in the long-term value of the TCI Group Stockholders' current
investment in the TCI Group. The Distribution would also give the TCI Group
Stockholders and other potential investors the opportunity to direct their
investment to their specific area of interest, satellite or cable, or to
continue to retain an interest in both distribution media. Furthermore, as a
part of TCI, the Company is currently one of several businesses competing for
the allocation of TCI's financial resources. As a separate, publicly traded
company, the Company will have increased flexibility to raise capital and
effect acquisitions by issuing its own securities.
The separation of the TCI Group's Digital Satellite Business from its
principal cable business will also permit management of the Company to focus on
the development and expansion of the Digital Satellite Business, and to tailor
its business strategies and capital investments in a manner best suited to that
business and its market, without concern for the objectives of, or competitive
effect on, the TCI Group's cable business. Further, as an independent, publicly
traded company, the Company will be able to design more effective incentive
compensation programs for its management and employees by linking their
compensation to the performance of the Company's Digital Satellite Business, as
reflected in the stock market's evaluation of the Company Stock, thereby
enhancing the Company's ability to attract, motivate and retain high quality
employees. See "The Distribution--Reasons for the Distribution."
FEDERAL INCOME TAX CONSEQUENCES
Prior to the Distribution, Baker & Botts, L.L.P., counsel for TCI, will
render an opinion to the effect that the Distribution should qualify as a tax-
free transaction to the TCI Group Stockholders under Section 355 of the
Internal Revenue Code of 1986, as amended (the "Code"), in which case no gain
or loss will be recognized by (and no amount will be included in the income of)
the TCI Group Stockholders by reason of their receipt of Company Common Stock
pursuant to the Distribution. See "The Distribution--Federal Income Tax
Consequences." The Company has not requested a ruling from the Internal Revenue
Service (the "Service") with respect to the federal income tax consequences of
the Distribution.
8
<PAGE>
CERTAIN CONSEQUENCES OF THE DISTRIBUTION
As a result of the Distribution, the TCI Group's interests in the Digital
Satellite Business will be owned and operated by a separate publicly held
company. Immediately after the Distribution, the TCI Group Stockholders will
own the same interests in each of the Company and TCI that they held in TCI on
the Record Date, but in the form of separate securities, TCI Group Common Stock
and Company Common Stock. The Company expects that the Series A Common Stock
and Series B Common Stock will be listed for trading on the Nasdaq National
Market under the symbols "TSAT A" and "TSAT B," respectively. No prediction can
be made as to the extent of the trading in the Company Common Stock, if any,
that will occur after the Distribution, or the prices at which the TCI Group
Common Stock or Company Common Stock will be traded. See "The Distribution--
Certain Consequences of the Distribution."
RELATIONSHIP BETWEEN TCI AND THE COMPANY AFTER THE DISTRIBUTION
After the Distribution, pursuant to a transition services agreement between
TCI and the Company (the "Transition Services Agreement"), TCI will provide to
the Company certain services and other benefits, including certain
administrative and other services that were provided to the Company by TCI
prior to the Distribution. On or before the Distribution Date, the Company will
also become a party to the existing tax sharing agreement among TCI and certain
of its subsidiaries (the "Tax Sharing Agreement"), which will provide, among
other things, for the allocation between the Company and the other members of
the TCI consolidated tax group of tax liabilities attributable to periods prior
to the Distribution. In addition, TCI Communications, Inc., a Delaware
corporation and the subsidiary of TCI that owns and operates cable systems in
the U.S. (together with its consolidated subsidiaries, "TCIC"), has
historically provided the Company with installation, maintenance, retrieval and
other customer fulfillment services for certain customers of the Company. TCIC
will continue to provide fulfillment services to the Company following the
Distribution, pursuant to a fulfillment agreement (the "Fulfillment Agreement")
with respect to customers of the PRIMESTAR(R) medium power service.
On the Distribution Date, the Company will issue to TCIC a promissory note in
the principal amount of $250,000,000 (the "Company Note"), representing a
portion of the Company's intercompany balance owed to TCIC on such date. The
remainder of such intercompany balance, which remainder was $472,101,000 at
June 30, 1996, will be assumed by TCI on or before the Distribution Date, in
part in the form of a capital contribution to the Company and in part as
consideration for the Company's assumption of TCI's obligations under certain
stock options.
TCIC also has agreed to make loans to the Company (the "TCIC Revolving
Loans") from time to time following the Distribution Date up to an aggregate
outstanding principal amount of $500,000,000. TCIC's commitment to make the
TCIC Revolving Loans and the Company's obligations with respect to the TCIC
Revolving Loans and the Company Note will be provided for in a credit
agreement, dated as of the Distribution Date, between the Company and TCIC (the
"TCIC Credit Facility"). The TCIC Credit Facility requires the Company to use
its best efforts to refinance the TCIC Credit Facility with external debt or
equity financing. See "Arrangements Between TCI and the Company After the
Distribution--TCIC Credit Facility"
Following the Distribution, TCI will continue to be liable under certain
contracts relating to the business of the Company, and, on or before the
Distribution Date, the Company will agree to indemnify TCI for any liability
resulting therefrom. In addition, TCI and the Company will agree on behalf of
themselves and their successors and assigns to certain indemnification
provisions arising primarily from the operation of their respective businesses.
9
<PAGE>
John C. Malone, the President of TCI and a member of the TCI Board, is also
Chairman of the Board and a director of the Company. See "Management of the
Company--Directors and Executive Officers."
See "Risk Factors--Relationship with TCI," "Risk Factors--Potential Conflicts
of Interest" and "Arrangements Between TCI and the Company After the
Distribution--Other Arrangements."
POTENTIAL CONFLICTS OF INTEREST
Following the Distribution, the Company may face potential conflicts of
interest with TCI and PRIMESTAR Partners. The Fulfillment Agreement may result
in a potential for conflicts of interest between the Company and TCIC since in
those parts of the Company's territories served by cable systems, the Company
competes for subscribers with the cable systems owned and operated by TCIC. In
order to offset this potential for conflicts, the Fulfillment Agreement
contains specific performance standards designed to ensure that the Company's
customers receive the appropriate service from TCIC's employees when they
perform installation, maintenance and other functions for the Company. In
addition, through PRIMESTAR Partners, the Company is a customer or potential
customer of programming services affiliated with the Liberty Media Group. The
Liberty Media Group's desire to maximize the fees it receives for its
programming may conflict with the desire of the Company and PRIMESTAR Partners
to minimize the fees that it pays for such programming.
The Company may also face potential conflicts of interest with PRIMESTAR
Partners because the Company holds a 20.86% interest in the Partnership but its
customers, at June 30, 1996, represented approximately 47% of the Partnership's
estimated installed Authorized Units. Although PRIMESTAR Partners may seek to
maximize the economic benefit to the Partnership of its dealings with its
Distributors, which could result in a potential conflict with the Company, a
supermajority vote requirement in connection with many material decisions helps
offset any such potential conflicts of interest. The Company alone, however,
would not have sufficient votes to block any such action.
Further, there is currently a dispute between the Company and PRIMESTAR
Partners regarding rights to capacity on the Company Satellites under certain
agreements. See "Business of the Company--High Power Satellites--Tempo Option."
The Company and PRIMESTAR Partners are currently attempting to resolve their
disagreement. There can be no assurance, however, that any resolution can be
reached, or can be reached on terms acceptable to the Company. However, the
Company does not believe that such dispute or its resolution is reasonably
likely to have a material adverse effect on the Company.
See "Risk Factors--Relationship with TCI," "Risk Factors--Dependence on
PRIMESTAR Partners," "Risk Factors--Potential Conflicts of Interest,"
"Arrangements Between TCI and the Company After the Distribution" and "Business
of the Company--PRIMESTAR Partnership Agreement."
TRANSFER AGENT
The transfer agent for the Company Common Stock will be The Bank of New York.
DIVIDEND POLICY
The Company does not anticipate declaring and paying cash dividends on the
Company Common Stock in the foreseeable future. The decision whether to apply
any legally available funds to the payment of dividends on the Company Common
Stock will be made by the Board of Directors of the Company (the "Company
Board") from time to time in the exercise of its business judgment, taking into
account the Company's financial conditions, results of operations, existing and
proposed commitments for use of the Company's funds and other relevant factors.
See "Description of Company Capital Stock--Common Stock--Dividends."
10
<PAGE>
RISK FACTORS AND FORWARD LOOKING STATEMENTS
In reviewing this Information Statement, stockholders should carefully
consider the matters described under the heading "Risk Factors" beginning on p.
15.
THIS INFORMATION STATEMENT CONTAINS MANY FORWARD-LOOKING STATEMENTS ABOUT
BUSINESS STRATEGIES, MARKET POTENTIAL, FUTURE FINANCIAL PERFORMANCE, NEW
SERVICE LAUNCHES AND OTHER MATTERS. SUCH STATEMENTS INVOLVE MANY RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH
STATEMENTS, INCLUDING, WITHOUT LIMITATION, THOSE RISKS AND UNCERTAINTIES
DESCRIBED UNDER THE HEADING "RISK FACTORS," BEGINNING ON P. 15.
11
<PAGE>
SUMMARY SELECTED FINANCIAL AND OTHER DATA
The following table presents summary financial data relating to the Company's
historical financial position as of June 30, 1996, and December 31, 1995 and
1994, and to the Company's historical results of operations for each of the six
month periods ended June 30, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1995. In addition, the following table
presents summary financial data relating to the Company's unaudited pro forma
financial condition as of June 30, 1996, and the Company's unaudited pro forma
results of operations for the six months ended June 30, 1996 and the year ended
December 31, 1995. The historical financial data for each of the years in the
three-year period ended December 31, 1995, is derived from the Audited Combined
Financial Statements of the Company for the corresponding periods, which
combined financial statements have been audited by KPMG Peat Marwick LLP,
independent auditors. The historical data for the other periods presented has
been derived from unaudited information. The unaudited pro forma statement of
operations data gives effect to (i) the Distribution, and (ii) the
"Reorganization Agreement," the "Fulfillment Agreement," the "Transition
Services Agreement," and the "Stock Option Agreements" (collectively, the "TCI
Intercompany Agreements"), as of January 1, 1995. The unaudited pro forma
balance sheet data gives effect to the Distribution and the TCI Intercompany
Agreements as of June 30, 1996. The unaudited pro forma data does not purport
to be indicative of the results of operations or financial position that may be
obtained in the future or that actually would have been obtained had such
transactions occurred on such dates. The following information should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and is qualified in its entirety by
reference to the historical and pro forma combined financial statements,
including the notes thereto, of the Company. For a description of the TCI
Intercompany Agreements, see "Arrangements Between TCI and the Company After
the Distribution."
<TABLE>
<CAPTION>
PRO FORMA(1) HISTORICAL PRO FORMA(1) HISTORICAL
------------ ----------------- ------------ -------------------------
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------------ --------------------------------------
1996 1996 1995 1995 1995 1994 1993
------------ -------- ------- ------------ -------- ------- ------
AMOUNTS IN THOUSANDS, EXCEPT PER AUTHORIZED UNIT AMOUNTS
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OPERATING AND
OTHER DATA:
Revenue................. $ 193,647 193,647 61,611 208,902 208,902 30,279 11,679
Operating, selling,
general and
administrative
expenses............... (187,936) (186,625) (56,717) (211,455) (214,116) (25,107) (7,069)
Depreciation............ (96,160) (83,230) (26,625) (76,128) (68,233) (18,903) (6,513)
--------- -------- ------- -------- -------- ------- ------
Operating loss........ (90,449) (76,208) (21,731) (78,681) (73,447) (13,731) (1,903)
Share of loss of
PRIMESTAR Partners..... (1,446) (1,446) (4,988) (8,969) (8,969) (11,722) (5,524)
Other, net.............. 23,462 25,266 9,867 14,608 27,514 9,677 3,491
--------- -------- ------- -------- -------- ------- ------
Net loss.............. $ (68,433) (52,388) (16,852) (73,042) (54,902) (15,776) (3,936)
========= ======== ======= ======== ======== ======= ======
Operating income (loss)
before
depreciation(2)........ $ 5,711 7,022 4,894 (2,553) (5,214) 5,172 4,610
========= ======== ======= ======== ======== ======= ======
Capital expenditures:
Satellite reception
equipment............ $175,340 139,397 442,781 109,184 14,881
Construction of
satellites........... 36,684 43,631 104,128 207,608 71,164
-------- ------- -------- ------- ------
$212,024 183,028 546,909 316,792 86,045
======== ======= ======== ======= ======
Average monthly revenue
per Authorized
Unit(3)................ $ 44 39 41 28 27
======== ======= ======== ======= ======
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31,
----------------------- ---------------
PRO FORMA(1) HISTORICAL 1995 1994
------------ ---------- ------- -------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C>
SUMMARY BALANCE SHEET AND OTHER DATA:
Property and equipment, net............ $ 1,000,669 1,000,669 871,888 393,212
=========== ========= ======= =======
Total assets........................... $ 1,062,442 1,051,142 916,111 405,519
=========== ========= ======= =======
Due to PRIMESTAR Partners.............. $ 386,219 386,219 382,900 278,772
=========== ========= ======= =======
Company Note........................... $ 250,000 -- -- --
=========== ========= ======= =======
Stock compensation obligation.......... $ 39,500 -- -- --
=========== ========= ======= =======
Equity................................. $ 305,413 583,613 470,686 117,837
=========== ========= ======= =======
Authorized Units....................... 659 535 100
========= ======= =======
</TABLE>
- --------
(1) For additional information concerning the pro forma adjustments, see the
Condensed Pro Forma Combined Financial Statements of the Company.
(2) Operating income before depreciation ("Operating Cash Flow") is a commonly
used measure of value and borrowing capacity within the Company's industry,
and is not intended to be a substitute for a measure of performance in
accordance with generally accepted accounting principles and should not be
relied upon as such.
(3) Represents average monthly revenue (exclusive of installation revenue)
divided by the average number of Authorized Units.
13
<PAGE>
ORGANIZATION OF THE COMPANY
The following chart illustrates the organizational structure of the Company and
each entity's operational assets:
--------------------------
TCI Satellite
Entertainment, Inc.
.Business of
distributing the
PRIMESTAR/(R)/
programming service
--------------------------
-----------------------------------------------------------------
- --------------------- --------------------- --------------------- -----------
TCISE Partner 1, Inc. TCISE Partner 2, Inc. Tempo Satellite, Inc. TCISE
.High power satellite Canada,Inc.
- --------------------- --------------------- construction . Rights
agreement and FCC under
construction permit certain
--------------------- agree-
10.43% 10.43% ments
relating
to the
Telesat
PRIMESTAR Partners, L.P. Transac-
(See Note 1 for a list of partners tion
unaffiliated with the Company, and ----------
each such partner's respective
partnership interest.)
Note 1:
-------
Partners in PRIMESTAR Partners, L.P.
unaffiliated with the Company:
G.E. Americom Services, Inc. 16.56%
Cox Satellite, Inc. 10.43%
Comcast DBS, Inc. 10.43%
Continental Satellite Company, Inc. 10.43%
New Vision Satellite 10.43%
TW Programming Co. 20.86%
14
<PAGE>
RISK FACTORS
An investment in the Company Common Stock involves certain risks, including
those described below, which can adversely affect the value of the Company
Common Stock. Neither TCI nor the Company makes, nor is any other person
authorized to make, any representation as to the future market value of the
Company Common Stock.
LIMITED OPERATING HISTORY; OPERATING LOSSES OF THE COMPANY
The Company has had a limited history as a separate operating entity. From
1990 to 1995, TCI's business of distributing PRIMESTAR(R) was operated by
TCIC. During this period of time, such business sustained significant
operating losses.
The Company has sustained significant losses in recent periods. The
Company's operating losses were $76,208,000 for the six months ended June 30,
1996, and $73,447,000, $13,731,000 and $1,903,000 for the years ended December
31, 1995, 1994, and 1993, respectively. The Company had net losses of
$52,388,000 for the six months ended June 30, 1996, and $54,902,000,
$15,776,000 and $3,936,000 for the years ended December 31, 1995, 1994 and
1993, respectively. Further, assuming the Distribution and the TCI
Intercompany Agreements were effective on January 1, 1995, the Company would
have incurred (i) pro forma operating losses of $90,449,000 and $78,681,000
and (ii) pro forma net losses of $68,433,000 and $73,042,000, during the six
months ended June 30, 1996 and the year ended December 31, 1995, respectively.
Improvements in the Company's results of operations are largely dependent upon
its ability to increase its customer base while maintaining its price
structure, reducing the rate at which subscribers terminate the Company's
service ("churn") and effectively managing the Company's costs. No assurance
can be given that any such improvements will occur. In addition, the Company
incurs significant sales commission and installation costs when its customers
initially subscribe to the service. Accordingly, management expects that
operating costs will remain high as a percentage of revenue so long as the
Company maintains its rapid growth in subscribers. The high cost of obtaining
new subscribers also magnifies the negative effects of subscriber churn. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical and pro forma financial statements, including
the notes thereto, of the Company.
RISKS OF FAILURE OR DELAY IN LAUNCH OF GE-2
Limited Life of Satellites. All satellites have limited useful lives, which
vary as a result of their construction, the durability of their components,
the capability of their solar arrays and batteries, the amount of
stationkeeping fuel remaining once in orbit, the launch vehicle used and the
accuracy of the launch. PRIMESTAR(R) is currently broadcast from K-1, which is
nearing the end of its useful operational life and is ultimately expected to
be replaced by GE-2. The ability of PRIMESTAR Partners to increase the number
of channels in the PRIMESTAR(R) programming service from 94 to approximately
140 channels is dependent upon the successful launch of GE-2 (or its
replacement, GE-3), and the deployment of the additional channels could be
adversely affected by an operational failure of the satellite's transponders
after launch. See "--Risks of Satellite Defect, Loss or Reduced Performance"
and "Business of the Company--PRIMESTAR By TCI--The PRIMESTAR(R) Service."
The minimum design life of GE-2 is 15 years. There can be no assurance
however that such satellite will achieve its minimum design life, and the
contract with GE Americom does not guarantee the minimum useful life of GE-2.
The Company could be adversely affected if a satellite used in connection with
its business failed prior to its minimum design life.
Risk of Inclined Orbit Operations. Communication satellites must maintain a
fixed orbital position for their signals to be received by stationary HSDs.
Accordingly, such satellites use maneuvering thrusters to maintain their
orbital positions. The limited on-board fuel capacity of conventional
satellites is a major factor
15
<PAGE>
limiting the useful life of such satellites. When on-board fuel supplies get
low, the satellite operator may cause the satellite to enter inclined orbit.
During inclined orbit operations North-South stationkeeping is terminated and
only East-West positioning maneuvers are performed, thereby conserving fuel
and extending the useful life of the satellite. Once inclined orbit operations
have begun, the North-South excursion of the satellite, measured in degrees of
drift above and below the equator, begins to grow steadily and PRIMESTAR
Partners could continue broadcasting for up to five months before experiencing
unacceptable outage levels as a result of the satellite signals moving outside
of the viewing angle of the home receiving antenna during portions of each
day.
In November 1996, prior to the expected availability of GE-2 for PRIMESTAR
Partners' use, K-1 will be replaced by K-2. GE Americom expects K-2 to begin
inclined orbit operations in January 1997 and, consequently, if a replacement
satellite is unavailable, PRIMESTAR subscribers could begin to experience
unacceptable outage levels in the month of June 1997. Such timing is only a
prediction, however, because at any point in time, the amount of on-board
maneuvering fuel can only be estimated. Nevertheless, a delay in the
availability of GE-2 (or, if applicable, GE-3) could result in a material
adverse effect on both PRIMESTAR Partners and the Company as a result of a
fully operational satellite not being available for PRIMESTAR Partners' use
within five months of the beginning of inclined orbit operations of K-2. See
"Business of the Company--PRIMESTAR By TCI--The PRIMESTAR(R) Service."
Risks of Satellite Defect, Loss or Reduced Performance. Satellites are
subject to significant risks, including: manufacturing defects affecting the
satellite or its components; launch failure resulting in damage to, or
destruction of, the satellite or incorrect orbital placement; and damage in
orbit caused by asteroids, space debris or electrostatic storms. Such factors
may prevent or limit commercial operation or reduce the satellite's useful
life.
While approximately 15% of all commercial geosynchronous satellite launches
have resulted in a total or constructive total loss, the failure rate varies
by launch vehicle and manufacturer. GE Americom has chosen one of the most
reliable launch vehicles available for GE-2. Provided no delays occur, GE-2 is
expected to be launched on January 31, 1997 via a dedicated ARIANE 4 launch
vehicle from Kourou, French Guyana. Arianespace is generally perceived by the
international launch insurance community to be among the most reliable launch
providers today. Since 1985, there have been 21 ARIANE 4 launches, of which 20
were successful. The only launch failure experienced by the ARIANE 4 since
1985 occurred on February 22, 1990. There can, however, be no assurance that
such launch vehicle will continue to be as reliable as it has been to date.
Neither the Company nor PRIMESTAR Partners is entitled to the benefit of any
launch insurance relating to the launch of any of GE Americom's satellites.
COMPETITIVE NATURE OF INDUSTRY
The industry in which the Company operates is highly competitive, and the
Company expects to face strong competition from existing and potential
competitors. The Company's competitors comprise a broad range of companies
engaged in communications and entertainment, including cable operators, other
digital satellite programming distributors, wireless cable operators,
television networks and home video products companies, as well as companies
developing new technologies. A number of telephone companies have also
expressed an interest in becoming subscription television providers and/or
have made investments in this industry. Certain of these competitors and
potential competitors are well established companies and have significantly
greater financial, marketing and programming resources than the Company.
Cable operators generally have large installed customer bases, and many
cable operators have significant investments in, and access to, programming.
According to industry sources, cable television service is currently available
to as much as 97% of the approximately 96 million U.S. television households,
and approximately 66% of total U.S. television households currently subscribe
to cable. In order to increase substantially its subscriber base, the Company
will be required to attract customers who currently subscribe to cable and to
develop commercial accounts, including hotels, motels, bars and restaurants as
well as multiple dwelling units
16
<PAGE>
("MDUs"). There can be no assurance that the Company will be able to establish
a substantial subscriber base or successfully attract customers in competition
with cable operators.
The Company also competes with companies offering programming through
various other satellite broadcasting systems, including DirecTv, Inc.
("DirecTv"), United States Satellite Broadcasting Corporation ("USSB") and
EchoStar Communications Corp. ("EchoStar"), which transmit from high power
satellites and generally use smaller dishes to receive their signals.
Alphastar, Inc. ("Alphastar") began offering medium power service in the
second quarter of 1996. A joint venture ("MCI/News Corp.") between MCI
Communications, Corp. ("MCI") and The News Corporation Limited ("News Corp.")
has announced that it expects to commence offering high power service by the
end of 1997. There can be no assurance that the Company will be able to
compete successfully against such other current and prospective providers of
digital satellite programming services, some of which will have access to
greater resources and/or have secured the rights to broadcast from a greater
number of satellite transponder frequencies. In addition, the territories in
which the Company is authorized to distribute PRIMESTAR(R) are assigned on a
non-exclusive basis. Accordingly, although only approximately 5% of the
distribution territories assigned by PRIMESTAR Partners' management currently
overlap, there can be no assurance that the Company will not in the future
face substantial competition from other existing and/or prospective authorized
distributors of PRIMESTAR(R). See "Business of the Company--Market for Digital
Satellite Services" and "Business of the Company--Competition."
ALTERNATIVE STRATEGIES FOR DEPLOYMENT OF HIGH POWER SATELLITES
Although the Company's current primary focus is the distribution of the
PRIMESTAR(R) medium power programming service, the Company continues to
explore various alternative strategies to participate in the high power
segment of the digital satellite industry. Currently, the Company is pursuing
two parallel strategies for deploying the Company Satellites. See "Business of
the Company--High Power Satellites."
The Telesat Transaction, in which one or both of the Company Satellites
would be launched into the 82(degrees) W.L. orbital position, requires
American and Canadian regulatory approval. See "Business of the Company--High
Power Satellites--Telesat Transaction." No assurance can be given that the
regulatory approvals necessary for the Telesat Transaction will be obtained or
will be obtained on terms satisfactory to the Company. See "--Risks of Adverse
Government Regulations and Adjudications--Telesat." Subject to completion of
the Telesat Transaction, Satellite No. 3 would be designated for deployment in
the 119(degrees) W.L. orbital position, pursuant to the Construction Permit.
In the event of any delay in the construction or deployment of Satellite No.
3, however, the Company may be required to request an extension of the
Construction Permit from the FCC and there can be no assurance that such
request would be granted. See "--Risks of Adverse Government Regulations and
Adjudications--Construction Permit." If the Telesat Transaction is not
consummated, the Company currently intends to deploy one of the Company
Satellites into the 119(degrees) W.L. orbital location. See "--Risks of
Adverse Government Regulations and Adjudications--Construction Permit." In
either event, a launch failure or other defect or damage affecting any such
satellite could prevent or postpone the Company's entrance into the high power
segment of the digital satellite industry. See "--Risks of Failure or Delay in
Launch of GE-2--Risks of Satellite Defect, Loss or Reduced Performance" and
"--Risks Pertaining to Foreign Satellite Launches." Alternatively, if either
alternative for deploying the Company Satellites is successfully implemented,
and current PRIMESTAR By TCI subscribers are given an opportunity to obtain
service from such high power satellites in lieu of their current PRIMESTAR(R)
service, the Company could incur substantial costs and expenses in connection
with upgrading such customers' satellite receivers, repointing their HSDs and
replacing their low noise block converters ("LNBs"), a component of the HSD.
The minimum design life of both of the Company Satellites is 12 years. There
can be no assurance, however, that either satellite will achieve its minimum
design life and the contract with Loral does not guarantee the minimum useful
life of the Company Satellites. See "--Risks of Failure or Delay in Launch of
GE-2--Limited Life of Satellites." The Company is entitled to the benefit of
certain limited warranties pursuant to the Satellite Construction Agreement
with Loral and certain insurance coverage pursuant to its agreements with
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Telesat. However, the insurance coverage provided through the Telesat
Transaction is subject to customary exceptions for acts of war, public
insurrection and the effects of certain weaponry. In addition, such warranties
and/or insurance coverage might not be sufficient to compensate the Company
for all of its losses in the event of a partial or total satellite failure or
casualty, even if such failure or casualty were a covered loss.
No assurance can be given that the Company will not significantly change the
direction of its high power strategy or elect to enter into agreements with
other parties to pursue other high power strategies.
DEPENDENCE ON ADDITIONAL CAPITAL; SUBSTANTIAL LEVERAGE
In the past, the Company has relied on TCI to meet the majority of the
Company's working capital and liquidity requirements. During the six months
ended June 30, 1996, and the year ended December 31, 1995, TCI made aggregate
advances to the Company of $165,491,000 and $398,323,000 respectively.
Following the Distribution, it is anticipated that TCI will cease to be a
source of long-term financing for the Company, although TCIC has agreed to
enter into the TCIC Credit Facility with the Company on an interim basis,
pending consummation of permanent financing. See "--Relationship with TCI,"
and "Arrangements Between TCI and the Company After the Distribution--TCIC
Credit Facility." Pursuant to the TCIC Credit Facility, the Company will be
required to use its best efforts to refinance the TCIC Credit Facility, and to
repay all obligations of the Company under the TCIC Credit Facility, as soon
as possible following the Distribution.
The Company also has relied upon advances from PRIMESTAR Partners to finance
the majority of the cost of constructing the Company Satellites. Such
advances, which aggregate $386,219,000 at June 30, 1996, are reflected as a
liability in the combined balance sheets included in the historical combined
financial statements of the Company. The Company expects that the amount due
to PRIMESTAR Partners will be settled through the sale or lease of all the DBS
capacity of the Company Satellites. The ultimate settlement of the amounts
advanced from PRIMESTAR Partners is dependent, in part, on the outcome of
certain uncertainties. For additional information concerning such
uncertainties, see "--Alternative Strategies for Deployment of High Power
Satellites," "--Risks of Adverse Government Regulations and Adjudications" and
"Business of the Company--High Power Satellites."
Following the Distribution, the Company will require significant additional
capital to meet its operating plan. Such capital will be used primarily to
purchase additional inventory of satellite reception equipment for sale or
rental to subscribers (including pursuant to existing minimum purchase
commitments), to finance the cost of installing new customers and to fund
operations and provide for working capital and other liquidity requirements
that may arise. The Company also has significant contingent obligations
pursuant to certain indemnification agreements and other arrangements. See,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and notes 4, 5 and 7 to the Unaudited Combined Financial
Statements of the Company.
As described above, the TCIC Credit Facility is intended to provide the
Company with a source of liquidity until such time as the Company is able to
arrange for permanent financing. In this regard, the Company currently is
seeking to arrange for a possible bank financing and may in the future seek to
obtain additional financing through an institutional private placement, a
public offering of debt securities or a combination of such sources. The
Company anticipates that it will use proceeds from any bank or other permanent
financing, together with any net cash provided by operations, to (i) repay all
amounts due under the TCIC Credit Facility and (ii) fund the Company's
projected liquidity requirements for the next eighteen months. Although the
Company believes that it will be able to obtain such permanent financing,
there can be no assurance that this will be the case. Additionally, faster-
than-anticipated subscriber growth or other contingencies may require
additional financing. The Company expects that, if additional financing is
needed, it would seek to obtain such financing through the capital markets,
including the high-yield debt market. No assurance can be given however that
such additional financing would be available on terms satisfactory to the
Company, or that sufficient financing to meet the Company's needs would be
available on any terms. See, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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The degree to which the Company becomes leveraged may adversely affect the
Company's ability to compete effectively against better capitalized
competitors and to withstand downturns in its business or the economy
generally, and could limit its ability to pursue business opportunities that
may be in the interests of the Company and its stockholders. The Company's
ability to service its debt will require growth in the Company's Operating
Cash Flow. There can be no assurance that the Company will be successful in
increasing its Operating Cash Flow by a sufficient magnitude or in a timely
manner or in raising additional equity or debt financing to enable it to meet
its debt service requirements. In addition, a failure of the Company to have
adequate access to capital may adversely affect the Company's ability, or
choice, to launch proposed products and services in the time frames discussed
herein.
ABILITY TO MANAGE GROWTH
The Company's business has grown rapidly since 1994, when PRIMESTAR Partners
completed its adoption of digital technology, and must continue to expand to
achieve the Company's business objectives. The Company believes that such
rapid growth has been a factor in the increases it has experienced in both
subscriber churn and bad-debt write-offs. Whether the Company can meet its
goal of increasing its customer base while maintaining its price structure,
reducing its churn rate and managing costs will depend upon, among other
things, the Company's ability to manage its growth effectively. To manage
growth effectively, the Company must continue to develop its internal and
external sales force, installation capability, customer service team and
information systems, maintain its relationships with third party vendors and
implement efficient procedures to mitigate subscriber credit risk. The Company
will also need to continue to grow, train and manage its employee base, and
its management will be required to assume even greater levels of
responsibility. If the Company is unable to manage its growth effectively, the
Company's business and results of operations could be materially adversely
effected.
RISKS OF ADVERSE GOVERNMENT REGULATIONS AND ADJUDICATIONS
General. The construction and launch of broadcasting satellites and the
operation of satellite broadcasting systems are subject to substantial
regulation by the FCC. FCC rules are subject to change in response to industry
developments, new technology and political considerations. The Company's
business and business prospects could be adversely affected by the adoption of
new laws, policies, and regulations. While Tempo has generally been successful
to date with respect to compliance with regulatory matters, there can be no
assurance that the Company will succeed in obtaining all requisite regulatory
approvals for its operations without the imposition of restrictions on, or
adverse consequences to, the Company. There can also be no assurance that
material adverse changes in regulations affecting the digital satellite
television industry or the Company will not occur in the future.
Construction Permit. Tempo holds the Construction Permit which authorizes
construction of a DBS system with 11 frequency channels at 119(degrees) W.L.
and 11 frequency channels at 166(degrees) W.L. The 119(degrees) W.L. position
is generally visible to HSDs throughout all fifty states; the 166(degrees) is
visible only in the western half of the continental U.S. as well as Alaska and
Hawaii. The FCC's DBS construction permits are conditioned on the satisfaction
of ongoing construction and related obligations. The Construction Permit
expires in May 1998, and if Tempo's satellites are not launched by then, there
can be no assurance that an extension of the Construction Permit would be
granted. In July 1993, Tempo filed an application with the FCC proposing minor
modifications to the technical designs of its satellites, which remains
pending. Approval by the FCC of the proposed modifications is necessary before
Tempo may launch the satellites. Tempo expects that the FCC would act on the
application when Tempo notifies it of Tempo's intention to launch the
satellites. There can be no assurance that the FCC will grant this
application.
In July 1996, WTCI filed an application with the FCC for authorization to
construct and operate an earth station to uplink video programming to Tempo's
proposed DBS system utilizing the 119(degrees) W.L. orbital slot. In October
1996, EchoStar and DirectSat Corporation ("DirectSat") jointly filed an
objection to the application, alleging that WTCI's uplink station would
interfere with operations of EchoStar's and DirectSat's DBS satellites
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at that same orbital location. WTCI filed an opposition to EchoStar's and
DirectSat's objection on October 28, 1996, demonstrating that no harmful
interference will result from its proposed operations and responding to the
objectors' other comments. If the FCC denies WTCI's application, Tempo will be
unable to operate its system. WTCI expects, but cannot assure, that its
application will be approved.
Telesat. On March 26, 1996, Western Tele-Communications, Inc. ("WTCI"), a
subsidiary of TCIC, filed an application with the FCC for authorization to
construct and operate an earth station to uplink video programming to the
Company Satellites, which would be launched into a Canadian DBS orbital
location (82(degrees) W.L.) and sold to Telesat pursuant to the Telesat
Transaction. On July 1, 1996, four cabinet-level departments of the executive
branch of the U.S. government filed a joint letter with the FCC recommending
that the FCC treat the application as premature and raising concerns regarding
the application relating to international agreement obligations, Canadian
content restrictions, Canadian licensing restrictions and domestic competition
policy (the "Executive Branch Letter"). On July 15, 1996, the FCC dismissed
WTCI's application, without prejudice, on the ground that the application was
premature because Canada has not yet issued licenses to Telesat, which will own
and operate the satellite containing the Company's transponders to which WTCI
will uplink. The FCC's order expressly did not address any of the substantive
issues raised by WTCI's application or by the various petitions to deny WTCI's
application that had been received from the Company's competitors. The FCC
indicated, however, that if WTCI refiled its application, it would take into
account concerns raised in the Executive Branch Letter with respect to the
application.
On August 14, 1996, WTCI filed a petition seeking reconsideration on the
ground that, although a formal license has not been issued, Industry Canada,
the government department that regulates communication satellites in Canada,
has in fact issued all the pre-launch authority it customarily grants to
satellite applicants and Telesat has received from Industry Canada its standard
support in principle for its proposal. In addition, WTCI contends that none of
the concerns raised in the Executive Branch Letter should impede grant of
WTCI's application. There can be no assurance, however, that the FCC will
respond favorably to WTCI's petition. Furthermore, although the Company
believes that WTCI's proposal is in the public interest and fully consistent
with applicable FCC rules and policies (as well as applicable treaties and
international agreements), there can be no assurance that the FCC will not deny
such application on substantive grounds when it reconsiders the matter, and the
Company cannot predict whether WTCI will ultimately receive the necessary
authorizations to operate the planned uplink station.
State Taxes. In addition to being subject to FCC regulation, operators of
satellite broadcast systems in the U.S. may be affected by imposition of state
and/or local sales taxes on satellite-delivered programming. According to the
Satellite Broadcasting and Communications Association ("SBCA"), several states,
including Maryland, Missouri, North Dakota, New York and Washington have either
adopted or proposed such taxes. Other states are in various stages of
considering proposals that would tax providers of satellite-delivered
programming and other communications providers. The adoption of state imposed
sales taxes could have adverse consequences to the Company's business.
There can be no assurance that additional government regulations affecting
the digital satellite television industry will not occur in the future.
DEPENDENCE ON PRIMESTAR PARTNERS
The Company's relationship with PRIMESTAR Partners is critical to the Company
and its business. The Company is a 20.86% partner in PRIMESTAR Partners and
substantially all the current revenue of the Company is derived from its
activities as a distributor of PRIMESTAR(R) programming and equipment, under
the name PRIMESTAR By TCI.
In addition to the Company and GEAS, the partners of PRIMESTAR Partners
include Cox Satellite, Inc, a subsidiary of Cox, Comcast DBS, Inc., a
subsidiary of Comcast, Continental Satellite Company, Inc., a subsidiary of
Continental Cablevision, Inc. ("Continental"), New Vision Satellite, a
partnership controlled by a
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subsidiary of Newhouse Broadcasting Corporation ("Newhouse") and TW Programming
Co., a partnership controlled by a subsidiary of Time Warner Inc. ("Time
Warner"). Time Warner has substantial interests, through its subsidiaries and
controlled partnerships, in video programming and distribution, and is the
second largest operator of cable systems in the U.S. (in terms of numbers of
basic subscribers), after TCI. Cox, Comcast and Continental are also among the
five largest cable system operators. In 1995, the cable systems formerly
controlled by Newhouse were contributed to a partnership controlled by Time
Warner. In 1996, Continental agreed to be acquired by U.S. WEST, Inc., a
regional bell operating company.
Pursuant to the Limited Partnership Agreement of PRIMESTAR Partners dated as
of February 8, 1990, as amended (the "PRIMESTAR Partnership Agreement"), if the
Company fails to pay its share of capital contributions or loans that the
partners agree to require or that are contemplated by budgets or business plans
approved by the partners, or that are otherwise necessary in order to satisfy
partnership commitments, the Company's interest in the Partnership will be
diluted and, if such interest is diluted to less than 5%, its right to vote or
exercise certain other rights may be forfeited. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and notes 4, 5
and 7 to the Unaudited Combined Financial Statements of the Company.
Although the PRIMESTAR Partnership Agreement contemplates that PRIMESTAR(R)
will be marketed and distributed primarily by affiliates of the Partnership's
partners, there are no written distribution agreements between PRIMESTAR
Partners and any of its distributors. Any dispute between PRIMESTAR Partners
and the Company regarding the Company's right to distribute PRIMESTAR(R), or
any material dispute regarding the terms and conditions of such distribution
rights, could have a material adverse effect on the Company, and no assurance
can be given that such a dispute could not arise in the future. However, as the
Company is currently the largest distributor of PRIMESTAR(R), serving about 47%
of PRIMESTAR Partners' estimated 1.4 million Authorized Units as of June 30,
1996, the Company does not anticipate that any such dispute would call into
question the Company's right to continue to distribute PRIMESTAR(R).
There is currently a dispute between the Company and PRIMESTAR Partners
regarding rights to capacity on the Company Satellites under certain
agreements. See "Business of the Company--High Power Satellites--Tempo Option."
The Company and PRIMESTAR Partners are currently attempting to resolve their
disagreement. There can be no assurance, however, that any resolution can be
reached, or can be reached on terms acceptable to the Company. However, the
Company does not believe that such dispute or its resolution is reasonably
likely to have a material adverse effect on the Company.
RISK OF SIGNAL PIRACY
In common with all providers of subscription television programming, the
Company faces the risk that the PRIMESTAR(R) programming signal will be
obtained by unauthorized users. If signal piracy became widespread, the
Company's revenue could be adversely affected. While management believes that
the encryption method utilized by PRIMESTAR Partners, which was developed by an
affiliate of General Instrument Corporation ("GI"), has been effective in
minimizing signal piracy, and there have been no published reports of breaches
in PRIMESTAR(R) security, there can be no assurance that changes in technology
will not render less effective the anti-piracy efforts associated with
PRIMESTAR(R).
RISK OF TECHNOLOGICAL CHANGES
Technology in the digital satellite television industry is subject to rapid
change, and new technologies are continuously being developed. Some competitors
of the Company may have or may obtain access to proprietary technologies that
are perceived by the market for satellite services as superior to, or more
desirable than, the technology of the Company and/or the technology used in the
PRIMESTAR(R) system. There can be no assurance that the Company and/or
PRIMESTAR Partners could obtain access to any such technology or that the lack
of any such technology would not adversely affect the ability of the Company to
compete with such competitors.
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RISKS PERTAINING TO FOREIGN SATELLITE LAUNCHES
One of the Company Satellites is expected to be launched by International
Launch Services ("ILS") on behalf of Lockheed-Khrunichev-Energia, Inc. ("LKE"),
a joint venture between Lockheed Martin Corporation ("Lockheed-Martin") and two
Russian Federation state-owned companies. The proposed launch site is located
at the Baikonur Cosmodrome in Kazakhstan, a territory of the former Soviet
Union.
Export licensing authorization from the U.S. government is required for the
transport of satellites to certain foreign countries, including Kazakhstan, and
for the exchange of certain information necessary to prepare the satellites for
launch. Although Loral has advised the Company that Loral has received export
licensing authorization with respect to the launch of such Company Satellite,
there can be no assurance that additional export licensing authorization from
the U.S. government will not be required in connection with such launch. In
addition, future launches may require separate export licensing authorization.
Political and/or economic instability in the former Soviet Union, and
political and other factors affecting the availability of U.S. export control
authorizations necessary for such a launch, could affect the cost, timing and
advisability of utilizing LKE as a launch provider. Any change in the launch
providers for the Company Satellites could result in delay in the launch of the
Company Satellites and accordingly, a delay in the Company's entrance into the
high power segment of the digital satellite industry.
RELATIONSHIP WITH TCI
On or before the Distribution Date, the Company and TCI will enter into
various agreements in connection with the Distribution, including the
Reorganization Agreement, the Transition Services Agreement and other
agreements described under "Arrangements Between TCI and the Company After the
Distribution." These agreements will provide, among other things, for TCI and
the Company to indemnify each other from tax and other liabilities relating to
their respective businesses following the Distribution, and for TCI to provide
to the Company certain services and other benefits, including certain
administrative and other services that were provided to the Company by TCI
prior to the Distribution. In addition, the Company has entered into a
Fulfillment Agreement with TCIC pursuant to which TCIC will continue to provide
installation, maintenance and other customer fulfillment services to customers
of the Company with respect to the PRIMESTAR(R) medium power service. See
"Arrangements Between TCI and the Company After the Distribution--Fulfillment
Agreement." Further, TCIC and the Company will enter into the TCIC Credit
Facility, which will set forth the Company's obligations with respect to the
Company Note and any TCIC Revolving Loans. The terms of the agreements that
will govern the relationship between the Company and TCI or TCIC, as
applicable, were established by TCI and TCIC in consultation with the Company's
management prior to the Distribution, when the Company was a wholly-owned
subsidiary of TCI, and are not the result of arms'-length negotiations.
Accordingly, although the Company believes that the terms and conditions of
these arrangements taken as a whole are reasonable, there can be no assurance
that the terms and conditions of these agreements are not more or less
favorable to the Company than those that might have been obtained from
unaffiliated third parties. In addition, there can be no assurance that
comparable services could be obtained from third parties if the Transition
Services Agreement or the Fulfillment Agreement were to be terminated. Although
the Company believes that its relationship with TCI is excellent, adverse
developments or material disputes with TCI following the Distribution could
have a material adverse effect on the Company.
Pursuant to the Transition Services Agreement, the Company will be obligated
to pay to TCI a per subscriber per month fee, commencing with the month of
January 1997, up to a maximum monthly fee of $3,000,000, and to reimburse TCIC
for its direct out-of-pocket expenses to third parties in providing the
services to the Company contemplated by that agreement. The Transition Services
Agreement will expire on December 31, 1999, unless earlier terminated. Pursuant
to the Fulfillment Services Agreement, the Company will pay TCIC for
installation and other fulfillment services in accordance with scheduled rates.
The installation charges allocated to the Company by TCIC aggregated
$28,212,000 and $69,154,000 during the six months ended June 30, 1996 and the
year ended December 31, 1995, respectively. If the Fulfillment Agreement had
been in effect
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on January 1, 1995, the estimated installation fees payable by the Company to
TCIC would have been $37,177,000 and $91,021,000 during the six months ended
June 30, 1996 and the year ended December 31, 1995, respectively. The amount
payable in future periods by the Company to TCIC under the Fulfillment
Agreement will be dependent upon the level of fulfillment services provided by
TCIC to the Company. The Fulfillment Agreement will have an initial term of
two years and will be terminable by the Company on 180 days notice to TCIC at
any time during the first six months following the Distribution Date. The
Company will also be obligated under the TCIC Credit Facility to repay the
Company Note (in the original principal amount of $250,000,000) and any TCIC
Revolving Loans that it may request be made to it. See "Arrangements Between
TCI and the Company After the Distribution."
POTENTIAL CONFLICTS OF INTEREST
Following the Distribution, the Company may face potential conflicts of
interest with TCI and PRIMESTAR Partners.
Pursuant to the Fulfillment Agreement, after the Distribution, TCIC, the
subsidiary of TCI that owns and operates cable systems in the U.S., will
continue to provide certain customers of the Company with installation,
maintenance and other customer fulfillment services. Although the Company
believes that the Fulfillment Agreement will provide the Company with
significant benefits, such agreement may result in a potential for conflicts
of interest since in those parts of the Company's territories served by cable
television, the Company competes for subscribers with the cable systems owned
and operated by TCIC. However, in order to offset this potential for conflicts
of interest, the Fulfillment Agreement contains specific performance standards
designed to ensure that the Company's customers receive appropriate service
from TCIC's employees when they perform installation, maintenance and other
functions for the Company. In addition, through PRIMESTAR Partners, the
Company is a customer or potential customer of programming services affiliated
with the Liberty Media Group, TCI's programming and electronic retailing
businesses. Consequently, the desire of the Liberty Media Group to maximize
the fees it receives for its programming may be in conflict with the desire of
the Company and PRIMESTAR Partners to minimize the fees that it pays for such
programming. See " --Relationship with TCI" and "Arrangements Between TCI and
the Company After the Distribution."
In addition, John Malone is currently the Chairman of the Board and a
director of the Company and is also the President and a director of TCI. See
"Management of the Company--Directors and Executive Officers." Dr. Malone is a
principal stockholder of TCI and will be a principal stockholder of the
Company. See "Principal Stockholders of the Company." TCI's directors and
executive officers as a group (17 persons) beneficially owned, as of April 30,
1996, shares of TCI Group Common Stock representing approximately 14.8% of the
shares of TCI Group Common Stock outstanding and approximately 45.9% of the
total voting power of the shares of TCI Group Common Stock outstanding, and
after giving effect to the Distribution, will beneficially own, as a group,
shares of the Company Common Stock representing approximately 45.9% of the
total voting power of the shares of Company Common Stock outstanding. No
formal policies or guidelines have been adopted by the Company Board to deal
with Board actions that may involve actual or potential conflicts of interest
between the Company and TCI. The directors of the Company, however, have
fiduciary obligations under Delaware law to the Company and all of its
stockholders. Dr. Malone will also have fiduciary obligations, when acting as
a TCI director, to TCI and its stockholders.
The Company may also face potential conflicts of interest with PRIMESTAR
Partners. The Company holds a 20.86% interest in the Partnership, but its
customers, at June 30, 1996, represented approximately 47% of PRIMESTAR
Partners' estimated installed Authorized Units. PRIMESTAR Partners may have an
interest in maximizing the economic benefit to the Partnership of its dealings
with its Distributors, which could result in a potential conflict with the
Company. However, the PRIMESTAR Partnership Agreement's requirement of a
supermajority vote of the Partners Committee (which manages and controls the
business and affairs of the Partnership and is composed of representatives of
the partners and two independent members) in connection with many material
decisions helps offset any potential conflicts of interest. The Company alone,
however, would not
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have sufficient votes to block any such action. See "Business of the Company--
PRIMESTAR Partnership Agreement." In addition, affiliates of each of the other
partners of the Partnership, individually and in joint ventures with each
other, TCI and others, have substantial other interests in the communications
and entertainment industries, some of which may compete with the business of
PRIMESTAR Partners and/or the Company. See "--Dependence on PRIMESTAR
Partners" and "Business of the Company--High Power Satellites--Tempo Option."
DISPARATE VOTING RIGHTS; SUBSTANTIAL STOCKHOLDERS
Holders of shares of the Series A Common Stock are entitled to one vote per
share, and holders of shares of the Series B Common Stock are entitled to ten
votes per share, on each matter presented to a vote of the holders of Company
Common Stock. After giving effect to the Distribution, Bob Magness, John
Malone and Kearns-Tribune Corporation ("Kearns-Tribune") will beneficially own
in the aggregate shares of Company Common Stock that represent approximately
13.1% of the total number of shares of Company Common Stock outstanding and
approximately 51.1% of the voting power of the shares of Company Common Stock
outstanding. See "Principal Stockholders of the Company." There are currently
no agreements among such persons or between such persons and the Company with
respect to the ownership, voting or disposition of shares of Company Common
Stock.
DIVIDENDS AND DIVIDEND POLICY
The Company does not anticipate declaring and paying cash dividends on the
Company Common Stock at any time in the foreseeable future. The decision
whether to apply legally available funds to the payment of dividends on the
Company Common Stock will be made by the Company Board from time to time in
the exercise of its business judgment, taking into account, among other
things, the Company's results of operations and financial condition, any then
existing or proposed commitments by the Company for the use of available
funds, and the Company's obligations with respect to the holders of any then
outstanding indebtedness or preferred stock. In addition, the Company may in
the future issue debt securities or preferred stock or enter into loan
agreements or other agreements that restrict the payment of dividends on, and
repurchases of, the Company's Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Description of
Company Capital Stock--Common Stock--Dividends."
POTENTIAL ANTITAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
(the "Company Charter") and the Company's Bylaws may have the effect of making
more difficult an acquisition of control of the Company in a transaction not
approved by the Company Board. These provisions include the disparate voting
rights of the Series A Common Stock and Series B Common Stock; provisions
giving the Company Board the power to issue up to 5,000,000 shares of
preferred stock, and to fix the rights and preferences thereof, without
further authorization of the Company's common stockholders; the requirement of
a supermajority vote to approve specified actions; and the other provisions
described under "Description of Company Capital Stock--Antitakeover Effects of
Certain Statutory Provisions and Provisions of the Company Charter and
Bylaws." In addition, the Company Board is divided into three classes, each of
which serves for a staggered three-year term, which may make it more difficult
for a third party to gain control of the Company Board. Many of these
provisions generally are designed to permit the Company to develop its
businesses and foster its long-term growth without the disruption caused by
the threat of a takeover not deemed by the Company Board to be in the best
interests of the Company and its stockholders. These provisions may also have
the effect of discouraging a third party from making a tender offer or
otherwise attempting to obtain control of the Company even though such an
attempt might be economically beneficial to the Company and its stockholders.
See "Description of Company Capital Stock--Antitakeover Effects of Certain
Statutory Provisions and Provisions of the Company Charter and Bylaws."
ABSENCE OF PRIOR TRADING MARKET
Prior to the date of this Information Statement, there has been no trading
market for the Company Common Stock and the Company is unable to predict the
extent of the market for the Company Common Stock or the
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prices at which such shares will trade. The prices at which the Series A Common
Stock and Series B Common Stock trade will be determined by the marketplace and
may be influenced by many factors, including, among others, investor perception
of the Company and of the business of distributing satellite services and
general economic and market conditions. The prices at which the Company Common
Stock trades may fluctuate broadly.
A "when-issued" trading market in the Series A Common Stock and the Series B
Common Stock may develop on or about the Record Date. The existence of such a
market means that shares can be traded prior to the time certificates are
actually available or issued. Whether or not there is a "when-issued" market
prior to the availability of certificates, until an orderly market for the
Series A Common Stock or Series B Common Stock develops, the prices at which
shares of such stock will trade may be affected by an imbalance of supply and
demand.
Although the Company has applied for the Series A Common Stock and Series B
Common Stock to be listed on the Nasdaq National Market effective concurrently
with the Distribution, there can be no assurance that an active trading market
will develop or, if one does develop, that it will be maintained.
FORWARD LOOKING STATEMENTS
This Information Statement contains certain forward-looking statements
regarding business strategies, market potential, future financial performance,
product launches and other matters. Such forward-looking statements inherently
involve many risks and uncertainties that could cause actual results to differ
materially from those projected in such statements. Overall potential risks and
uncertainties include such factors as the continued health of the multichannel
video programming distribution industry, the satellite services industry and
the economy in general; the ability of vendors to deliver required equipment,
software and services; potential changes in law and regulation and adverse
outcomes from regulatory proceedings; changes in the nature of key strategic
relationships with partners and joint venturers; competitor responses to the
Company's products and services; and the overall market acceptance of such
products and services, including acceptance of the pricing of such products and
services.
THE DISTRIBUTION
DESCRIPTION OF THE DISTRIBUTION
The Distribution will be made on the Distribution Date to holders of record
of TCI Group Common Stock at the close of business on the Record Date on the
basis of one share of Series A Common Stock for each ten shares of Series A TCI
Group Common Stock held of record as of such time and one share of Series B
Common Stock for each ten shares of Series B TCI Group Common Stock held of
record as of such time. No certificates or scrip representing fractional shares
of Series A Common Stock or Series B Common Stock will be issued. Fractions of
one-half or larger of a share will be rounded up and fractions of less than
one-half of a share will be rounded down to the nearest whole number of shares
of Series A Common Stock or Series B Common Stock.
Stock certificates representing the shares of Series A Common Stock and
Series B Common Stock to which the TCI Group Stockholders on the Record Date
are entitled will be delivered to such shareholders in a separate mailing. The
Distribution will not affect the number of shares of TCI Group Common Stock
held by the TCI Group Stockholders. The TCI Group Stockholders are not required
to take any action or pay any consideration in connection with the
Distribution.
EXPENSES OF THE DISTRIBUTION
It is estimated that the direct legal, financial advisory, accounting,
printing, mailing and other expenses (including the fees of TCI's and the
Company's transfer agents) will total approximately $3,000,000, and will be
borne 50% by TCI and 50% by the Company. These expenses do not include any of
the costs associated with the time spent by TCI's and the Company's officers
and legal, accounting and other personnel in connection with the Distribution
or other internal costs of TCI or the Company. Upon request, TCI will pay the
reasonable expenses of brokerage firms, custodians, nominees and fiduciaries
who are record holders of TCI shares for forwarding this Information Statement
to the beneficial owners of such shares.
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REASONS FOR THE DISTRIBUTION
The Distribution has been designed to separate the TCI Group's interests in
the cable distribution business from its interests in the Digital Satellite
Business--two businesses that use distinct distribution networks to provide
entertainment and other programming potentially to the same customer. The
Digital Satellite Business has grown substantially in recent years and, as a
result, the joint valuation and operation of these businesses have become less
desirable. TCI's management believes that, because of the relative size of the
assets and business of the Company compared to that of the TCI Group as a
whole, the value of the Company is largely overlooked by the investment
community. In addition, the separation of the TCI Group's Digital Satellite
Business from its principal cable business will permit management of the
Company to focus on the development and expansion of the Digital Satellite
Business in a manner best suited to that business and its market, without
concern for the objectives of, or competitive effect of such expansion on, the
TCI Group's cable business.
The separation of the TCI Group's Digital Satellite Business from its cable
business will enable the market to focus on the individual strengths of the
Company and more accurately evaluate the Company's performance compared to
other companies in the Digital Satellite Business. By allowing the market to
establish a separate valuation for the Company, the Distribution should, in
management's opinion, result in an increase in the long-term value of the TCI
Group Stockholders' current investment in the TCI Group. The Distribution would
also give the TCI Group Stockholders and other potential investors the
opportunity to direct their investment to their specific area of interest,
satellite or cable, or to continue to retain an interest in both distribution
media. The separate reporting of the results of the Company's Digital Satellite
Business and the TCI Group's cable business should also create a framework for
increased and more focused equity research coverage of both companies by the
investment community. Furthermore, as a part of TCI, the Company is currently
one of several businesses competing for the allocation of TCI's financial
resources. As a separate, publicly traded company, the Company will have
increased flexibility to raise capital and effect acquisitions by issuing its
own securities.
In addition, after the Distribution, the Company will be able to focus better
on responding to the operational and distribution characteristics and
competitive dynamics of the Digital Satellite Business and the Company's
management will be able to tailor its business strategies and capital
investments to the specific requirements of the Digital Satellite Business.
Further, as an independent, publicly traded company, the Company will be able
to design more effective incentive compensation programs for its management and
employees by linking their compensation to the performance of the Company's
Digital Satellite Business, as reflected in the stock market's evaluation of
the Company Stock, thereby enhancing the Company's ability to attract, motivate
and retain high quality employees.
CERTAIN CONSEQUENCES OF THE DISTRIBUTION
As a result of the Distribution, TCI's interests in the Digital Satellite
Business will be owned and operated by a separate publicly held company. The
TCI Group Stockholders will own the same interest in each of the Company and
TCI that they held in TCI on the Record Date, but in the form of separate
securities, TCI Group Common Stock and Company Common Stock. The Series A
Common Stock and the Series B Common Stock are expected to be approved for
listing on the Nasdaq National Market under the symbols "TSAT A" and "TSAT B,"
respectively. The transfer agent and registrar for the Company Common Stock
will be The Bank of New York.
The Distribution will not affect the number of outstanding shares of TCI
Group Common Stock or the rights of any TCI Group Stockholder with respect
thereto.
RESTRICTIONS ON TRANSFER
Shares of the Company Common Stock distributed to the TCI Group Stockholders
pursuant to the Distribution will be freely transferable under the Securities
Act of 1933, as amended (the "Securities Act"), except for shares received by
any persons who may be deemed to be "affiliates" of the Company as that term is
defined in Rule 144 promulgated under the Securities Act. Persons who may be
deemed to be affiliates of the
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Company after the Distribution generally include individuals or entities that
control, are controlled by, or are under common control with, the Company and
may include certain officers and directors of the Company as well as principal
stockholders of the Company. Persons who are affiliates of the Company will be
permitted to sell their shares of the Company Common Stock only pursuant to an
effective registration statement under the Securities Act or an exemption from
the registration requirements of the Securities Act, such as the exemptions
provided by Section 4(2) of the Securities Act or Rule 144 thereunder.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth a summary of the material federal income
tax consequences under the Code, to holders of TCI Group Common Stock with
respect to the receipt of the Company Common Stock pursuant to the
Distribution. The discussion may not address all federal income tax
consequences that may be relevant to particular TCI Group Stockholders, e.g.,
foreign persons, dealers in securities and persons who received TCI Group
Common Stock in compensatory transactions. In addition, the discussion does
not address any state, local or foreign tax considerations relative to the
Distribution. ACCORDINGLY, ALL HOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS.
TCI has not requested a ruling from the Service with respect to the federal
income tax consequences of the Distribution. However, as a condition of the
consummation of the Distribution, TCI will receive an opinion of Baker &
Botts, L.L.P. ("Counsel") that: (i) for federal income tax purposes, the
Distribution should be treated as a tax-free transaction qualifying under
Section 355 of the Code; and (ii) the following discussion insofar as it
relates to the statements of law or legal conclusions is correct in all
material respects.
In rendering the tax opinion, Counsel will rely upon certain representations
and covenants made by TCI, certain of its stockholders and the Company,
including the following: (a) following the Distribution, the holders of TCI
Group Common Stock must, in the aggregate, maintain a substantial continuing
ownership interest in the Company Common Stock they receive in the
Distribution; and (b) the Company must continue its historic business. The tax
opinion will be explicitly conditioned upon the accuracy of such
representations and covenants and upon certain assumptions critical to the
Distribution qualifying as a tax-free spinoff under Section 355 of the Code.
The tax opinion does not bind the Service nor does it preclude the Service
from adopting a contrary position from that taken in the tax opinion. In the
event the representations or assumptions are not accurate or the covenants are
breached, then TCI and the Company will be unable to rely on the tax opinion.
Assuming the Distribution qualifies as a tax-free spinoff under Section 355,
the following tax consequences will result:
(1) No gain or loss will be recognized by or includable in the income
of a holder of TCI Group Common Stock solely as a result of the
receipt of Company Common Stock pursuant to the Distribution;
(2) No gain or loss will be recognized by TCI or the Company solely as
a result of the Distribution, except as noted below with respect to
deferred intercompany gains and excess loss accounts;
(3) The tax basis of the TCI Group Common Stock held by a TCI Group
Stockholder immediately before the Distribution will be apportioned
between such TCI Group Common Stock and the Company Common Stock
received by such stockholder in the Distribution based upon the
relative fair market value of such TCI Group Common Stock and
Company Common Stock on the date of the Distribution; and
(4) Assuming that the TCI Group Common Stock held by a TCI Group
Stockholder is held as a capital asset, the holding period for
Company Common Stock received in the Distribution will include the
period during which such TCI Group Common Stock was held.
Even if the Distribution qualifies as a tax-free spinoff pursuant to Section
355 of the Code, TCI will recognize as a result of the Distribution any
deferred intercompany gain with respect to the Company's assets. TCI estimates
that such gain will be approximately $20 million. In addition, the movement of
assets in preparation for the Distribution will generate additional deferred
intercompany gain which will be recognized as
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a result of the Distribution. The amount of such gain will depend upon the
valuation of certain assets but may be substantial. In addition, immediately
prior to the Distribution, TCI may have an excess loss account on the Company
Common Stock, which is the equivalent of a negative basis. TCI would be
required to recognize the amount of this negative basis as a result of the
Distribution. TCI believes that such amount, if any, will be relatively small.
Notwithstanding the opinion of Counsel referred to above, the application of
Section 355 of the Code to the Distribution is complex and may be subject to
differing interpretation. In particular, the Service may challenge the tax-free
status of the Distribution on the grounds that it lacks an adequate "business
purpose" or that the active business requirement of Section 355(b) of the Code
(which requires the continuation after the Distribution of a business conducted
for at least five years prior to the Distribution) is not satisfied.
Accordingly, there can be no assurance that the Service will not successfully
assert that the Distribution is a taxable event.
If the Distribution does not qualify as a tax-free spinoff under Section 355
of the Code, then: (i) TCI would recognize capital gain equal to the difference
between the fair market value of the Company Common Stock on the date of the
Distribution and TCI's tax basis in such stock; (ii) each stockholder receiving
shares of Company Common Stock in the Distribution may be treated as having
received a distribution equal to the value of the Company Common Stock received
which would be taxable as ordinary income to the extent of TCI's current and
accumulated earnings and profits; (iii) the holding period for determining
capital gain treatment of the Company Common Stock received in the Distribution
would commence on the date of the Distribution; and (iv) each stockholder would
have a tax basis in the shares of Company Common Stock received in the
Distribution equal to the fair market value of such shares. Corporate
stockholders may be eligible for a dividends-received deduction (subject to
certain limitations) with respect to the portion of the Distribution
constituting a dividend, and may be subject to the Code's extraordinary
dividend provisions which, if applicable, would require a reduction in such
holder's tax basis in his or her TCI Group Common Stock to the extent of such
deduction.
THE FOREGOING IS A SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSIDERATIONS OF
THE DISTRIBUTION UNDER CURRENT LAW. EACH STOCKHOLDER SHOULD CONSULT HIS OR HER
TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH
STOCKHOLDER, IN LIGHT OF HIS OR HER PERSONAL CIRCUMSTANCES, INCLUDING THE
APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
TREATMENT OF OUTSTANDING TCI STOCK OPTIONS AND SARS
Certain directors, officers and employees of TCI and its subsidiaries
(including the Company) have been granted options to purchase shares of Series
A TCI Group Common Stock ("TCI Options") and stock appreciation rights with
respect to shares of Series A TCI Group Common Stock ("TCI SARs"). The TCI
Options and TCI SARs have been granted pursuant to various stock plans of TCI
(the "TCI Plans"). The TCI Plans give the committee of the TCI Board that
administers the TCI Plans (the "TCI Plan Committee") the authority to make
equitable adjustments to outstanding TCI Options and TCI SARs in the event of
certain transactions, of which the Distribution is one.
The TCI Plan Committee and the TCI Board have determined that, immediately
prior to the Distribution, each TCI Option will be divided into two separately
exercisable options: (i) an option to purchase Series A Common Stock (an "Add-
on Company Option"), exercisable for the number of shares of Series A Common
Stock that would have been issued in the Distribution in respect of the shares
of Series A TCI Group Common Stock subject to the applicable TCI Option, if
such TCI Option had been exercised in full immediately prior to the Record
Date, and containing substantially equivalent terms as the existing TCI Option,
and (ii) an option to purchase Series A TCI Group Common Stock (an "Adjusted
TCI Option"), exercisable for the same number of shares of Series A TCI Group
Common Stock as the corresponding TCI Option had been. The per share exercise
price of each TCI Option will be allocated between the Add-on Company Option
and the Adjusted TCI Option into which it is divided, and all other terms of
the Add-on Company Option and Adjusted TCI Option will in all material respects
be the same as such TCI Option. Similar adjustments will be made to the
outstanding TCI
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SARs, resulting in the holders thereof holding Adjusted TCI SARs and Add-on
Company SARs instead of TCI SARs, effective immediately prior to the
Distribution. The foregoing adjustments will be made pursuant to the anti-
dilution provisions of the TCI Plans pursuant to which the respective TCI
Options and TCI SARs were granted. Notwithstanding the foregoing, in order to
give the Company an opportunity to qualify for a registration statement on Form
S-3, Add-on Company Options (and Add-on Company SARs) will not be exercisable
for Series A Common Stock during the first fifteen months following the
Distribution, and Add-on Company Options (and Add-on Company SARs) which would
otherwise have expired during the first eighteen months following the
Distribution will remain in effect until the expiration of such eighteen month
period. Such deferral will not otherwise affect the vesting schedule or other
terms and conditions of the Add-on Company Options (and Add-on Company SARs).
As a result of the foregoing, certain persons who remain TCI employees or
non-employee directors after the Distribution and certain persons who were TCI
employees prior to the Distribution but become Company employees after the
Distribution will hold both Adjusted TCI Options and separate Add-on Company
Options and/or will hold both Adjusted TCI SARs and separate Add-on Company
SARs. The obligations with respect to the Adjusted TCI Options, Add-on Company
Options, Adjusted TCI SARs and Add-on Company SARs held by TCI employees and
non-employee directors following the Distribution will be obligations solely of
TCI. The obligations with respect to the Adjusted TCI Options, Add-on Company
Options, Adjusted TCI SARs and Add-on Company SARs held by persons who are
Company employees following the Distribution and are no longer TCI employees
will be obligations solely of the Company. Prior to the Distribution, TCI and
the Company will enter into an agreement to sell to each other from time to
time at the then current market price shares of Series A TCI Group Common Stock
and Series A Common Stock, respectively, as necessary to satisfy their
respective obligations under such securities.
EFFECTS OF THE DISTRIBUTION ON OUTSTANDING PREFERRED STOCK OF TCI AND TCIC AND
CONVERTIBLE NOTES OF TCI UA, INC.
As a result of the Distribution, the conversion rates of TCI's (i) Series C
Convertible Preferred Stock, (ii) Series F Convertible Redeemable Participating
Preferred Stock, and (iii) Series G Redeemable Convertible TCI Group Preferred
Stock, shall be adjusted in accordance with a formula based on the aggregate
fair market value of the Company Common Stock issued in the Distribution,
relative to the aggregate market price of the Series A TCI Group Common Stock
on the Record Date. Similarly, as a result of the Distribution, the exchange
rate of TCIC's Series A Cumulative Exchangeable Preferred Stock shall be
adjusted in accordance with a formula based on the aggregate fair market value
of the Company Common Stock issued in the Distribution, relative to the
aggregate market price of the Series A TCI Group Common Stock on the Record
Date.
As a result of the Distribution, the conversion mechanism for TCI's Series D
Convertible Preferred Stock ("TCI Series D Preferred Stock") will be adjusted
so that, on conversion, the holders of TCI Series D Preferred Stock will have a
right to receive, in addition to shares of TCI Group Common Stock, the same
number of shares of Company Common Stock that they would have received had they
converted their TCI Series D Preferred Stock to TCI Group Common Stock prior to
the Distribution.
Under the Convertible Notes due December 12, 2021 of TCI UA, Inc., the
Distribution will require an adjustment to the conversion mechanism in
accordance with a formula, so that either the conversion price will be reduced
(and the number of shares of Series A TCI Group Common Stock issuable upon
conversion increased), or holders of such notes will be entitled to receive on
conversion shares of Series A Common Stock in addition to shares of Series A
TCI Group Common Stock, depending on the aggregate fair market value of the
Company Common Stock distributed to holders of Series A TCI Group Common Stock
in the Distribution.
For purposes of each of the above adjustments, the determination of the TCI
Board as to the fair market value of the Company Common Stock distributed in
the Distribution shall be conclusive. See "Arrangements Between TCI and the
Company After the Distribution--Other Arrangements."
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ARRANGEMENTS BETWEEN TCI AND THE COMPANY AFTER THE DISTRIBUTION
Following the Distribution, the Company and TCI will operate independently,
and neither will have any stock ownership, beneficial or otherwise, in the
other. For the purposes of governing certain of the ongoing relationships
between the Company and TCI after the Distribution, and to provide mechanisms
for an orderly transition, on or before the Distribution Date, the Company and
TCI will enter into various agreements, including the Reorganization
Agreement, the Transition Services Agreement, an amendment to TCI's existing
Tax Sharing Agreement, the Indemnification Agreements and the Trade Name and
Service Mark License Agreement, all of which are described below. In addition,
TCIC will continue to provide installation, maintenance, retrieval and other
customer fulfillment services for certain customers of the Company, pursuant
to the Fulfillment Agreement described below.
REORGANIZATION AGREEMENT
On or before the Distribution Date, TCI, TCIC and a number of other TCI
subsidiaries, including the Company, will enter into a Reorganization
Agreement (the "Reorganization Agreement"), which will provide for, among
other things, the principal corporate transactions required to effect the
Distribution, the conditions thereto and certain provisions governing the
relationship between the Company and TCI with respect to and resulting from
the Distribution.
Certain of the Company's assets relating to the Digital Satellite Business
have historically been owned by subsidiaries of TCI other than the Company and
its predecessors. These assets include the capital stock of Tempo, the 20.86%
partnership interests in PRIMESTAR Partners, and the TCI Group's rights under
certain agreements relating to the Telesat Transaction. The Reorganization
Agreement will provide for, among other things, the transfer of these assets
to the Company and for the assumption by the Company of related liabilities.
No consideration will be payable by the Company for these transfers, except
that two subsidiaries of the Company will purchase the TCI Group's partnership
interests in PRIMESTAR Partners for consideration payable by delivery of
promissory notes issued by such subsidiaries (the "K-1 Notes"), which
promissory notes will be assumed by TCI on or before the Distribution Date in
the form of a capital contribution to the Company. The Reorganization
Agreement also will provide for certain cross-indemnities designed to make the
Company financially responsible for all liabilities relating to the Digital
Satellite Business prior to the Distribution, as well as for all liabilities
incurred by the Company after the Distribution, and to make TCI financially
responsible for all potential liabilities of the Company which are not related
to the Digital Satellite Business, including, for example, liabilities arising
as a result of the Company's having been a subsidiary of TCI. The
Reorganization Agreement further will provide for each of the Company and TCI
to preserve the confidentiality of all confidential or proprietary information
of the other party, for five years following the Distribution, subject to
customary exceptions, including disclosures required by law, court order or
government regulation.
Pursuant to the Reorganization Agreement, on or before the Distribution
Date, the Company will issue to TCIC the Company Note, in the principal amount
of $250,000,000, representing a portion of the Company's intercompany balance
owed to TCIC on such date. See "--TCIC Credit Facility," below. Pursuant to
the Reorganization Agreement, the remainder of the Company's intercompany
balance owed to TCIC on the Distribution Date, as well as the indebtedness
represented by the K-1 Notes, will be assumed by TCI in the form of (i) a
$100,000,000 capital contribution to the Company and (ii) consideration for
the Company's assumption of TCIs obligations under options granted to Brendan
R. Clouston and Larry E. Romrell to purchase shares of Series A Common Stock
representing 1.0%, and to David P. Beddow to purchase shares of Series A
Common Stock representing 0.5%, of the shares of Company Common Stock issued
and outstanding on the Distribution Date, determined immediately after giving
effect to the Distribution but before giving effect to the issuance of the
shares of Series A Common Stock issuable upon exercise of such options. See
the Condensed Pro Forma Combined Financial Statements of the Company.
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The Reorganization Agreement may be terminated, and the Distribution may be
abandoned, at any time prior to the Distribution Date, by and in the sole
discretion of the TCI Board, without the approval of TCI Group Stockholders or
any other persons. In the event of any such termination or abandonment, TCI
will have no liability to any person under the Reorganization Agreement or any
obligation to effect the Distribution thereafter.
TRANSITION SERVICES AGREEMENT
Pursuant to the Transition Services Agreement between TCI and the Company,
following the Distribution, TCI will provide to the Company certain services
and other benefits, including certain administrative and other services that
were provided by TCI prior to the Distribution. Such services shall include
(i) tax reporting, financial reporting, payroll, employee benefit
administration, workers' compensation administration, telephone, fleet
management, package delivery, management information systems, billing, lock
box, remittance processing and risk management services, (ii) other services
typically performed by TCI's accounting, finance, treasury, corporate, legal,
tax, benefits, insurance, facilities, purchasing, fleet management and
advanced information technology department personnel, (iii) use of
telecommunications and data facilities and of systems and software developed,
acquired or licensed by TCI from time to time for financial forecasting,
budgeting and similar purposes, including without limitation any such software
for use on personal computers, in any case to the extent available under
copyright law or any applicable third-party contract, (iv) technology support
and consulting services, and (v) such other management, supervisory, strategic
planning or other services as the Company and TCI may from time to time
mutually determine to be necessary or desirable.
Pursuant to the Transition Services Agreement, TCI has also agreed to
provide the Company with certain most-favored-customer rights to programming
services that TCI or a wholly owned subsidiary of TCI may own in the future
and access to any volume discounts that may be available to TCI for purchase
of HSDs, satellite receivers and other equipment.
As compensation for services rendered to the Company and for the benefits
made available to the Company pursuant to the Transition Services Agreement,
the Company will pay TCI a fee of $1.50 per qualified subscribing household or
other customer unit (regardless of the number of satellite receivers) per
month, commencing with the month of January 1997, up to a maximum of
$3,000,000 per month, and reimburse TCI quarterly for direct, out-of-pocket
expenses incurred by TCI to third parties in providing the services.
The Transition Services Agreement will continue in effect until the close of
business on December 31, 1999 and will be renewed automatically for successive
one-year periods thereafter, unless earlier terminated by (i) either party at
the end of the initial term or the then current renewal term, as applicable,
on not less than 180 days' prior written notice to the other party, (ii) TCI
upon written notice to the Company following certain changes in control of the
Company, and (iii) either party if the other party is the subject of certain
bankruptcy or insolvency-related events.
TAX SHARING AGREEMENT
Through the Distribution Date, the Company's results of operations have been
and will be included in TCI's consolidated U.S. federal income tax returns, in
accordance with the existing tax sharing arrangements among TCI and its
consolidated subsidiaries. Effective July 1, 1995, TCI, TCIC and certain other
subsidiaries of TCI entered into a tax sharing agreement (the "Tax Sharing
Agreement"), which formalized such pre-existing tax sharing arrangements and
implemented additional procedures for the allocation of certain consolidated
income tax attributes and the settlement of certain intercompany tax
allocations. The Tax Sharing Agreement encompasses U.S. Federal, state, local
and foreign tax consequences and relies upon the Code and any applicable
state, local and foreign tax law and related regulations. On or before the
Distribution Date, the Tax Sharing Agreement will be amended to provide that
the Company will be treated as if it had been a party to the Tax Sharing
Agreement, effective July 1, 1995. Pursuant to the amended Tax Sharing
Agreement, beginning on the July 1, 1995 effective date, the Company is
responsible to TCI for its share of current consolidated income tax
liabilities. TCI is responsible to the Company to the extent that the
Company's income tax attributes generated after the effective date are
utilized by TCI to reduce its consolidated income tax liabilities.
Accordingly, all tax
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attributes generated by the Company's operations after the effective date
including, but not limited to, net operating losses, tax credits, deferred
intercompany gains, and the tax basis of assets are inventoried and tracked for
the entities comprising the Company.
INDEMNIFICATION AGREEMENTS
On or before the Distribution Date, the Company will enter into
Indemnification Agreements (the "Indemnification Agreements") with TCIC, TCI
Technology Ventures, Inc. ("TCITV") and TCI UA 1, Inc. ("TCI UA 1"). The
Indemnification Agreement with TCIC will provide for the Company to reimburse
TCIC for any amounts drawn under an irrevocable transferable letter of credit
issued by the Bank of New York for the account of TCIC to support the Company's
share of PRIMESTAR Partners' obligations under an Amended and Restated
Memorandum of Agreement, effective as of October 18, 1996, between the
Partnership and GE Americom, with respect to PRIMESTAR Partners' use of
transponders on GE-2, to be launched by GE Americom (the "GE-2 Agreement"). The
original drawable amount of such letter of credit is $25,000,000, increasing to
$75,000,000 if PRIMESTAR Partners exercises its option under the GE-2 Agreement
to extend the term of such agreement for the remainder of the useful life of
GE-2. See "Risk Factors--Risks of Failure or Delay in Launch of GE-2--Risks of
Satellite Defect, Loss or Reduced Performance," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business of the
Company--PRIMESTAR By TCI--The PRIMESTAR(R) Service."
The Indemnification Agreement with TCITV will provide for the Company to
indemnify and hold harmless TCITV and certain related persons from and against
any losses, claims and liabilities arising out of certain agreements relating
to the proposed Telesat Transaction, which TCITV will assign to the Company in
connection with the Distribution. The Indemnification Agreement with TCI UA 1
will provide for the Company to reimburse TCI UA 1 for any amounts drawn under
an irrevocable transferable letter of credit issued by Chemical Bank for the
account of TCI UA 1 (the "TCI UA 1 Letter of Credit"), which supports a credit
facility (the "PRIMESTAR Credit Facility") that was obtained by PRIMESTAR
Partners to finance advances to Tempo for payments due in respect of the
construction of the Company Satellites and that is supported by letters of
credit arranged for by affiliates of the partners of the Partnership (other
than GEAS).
The TCIC and TCI UA 1 Indemnification Agreements further provide for the
Company to indemnify and hold harmless TCIC and TCI UA 1, respectively, and
certain related persons from and against any losses, claims, and liabilities
arising out of the respective letters of credit or any drawings thereunder. The
payment obligations of the Company to TCIC and TCI UA 1, under such
Indemnification Agreements will be subordinated in right of payment with
respect to certain future obligations of the Company to financial institutions.
TRADE NAME AND SERVICE MARK LICENSE AGREEMENT
Pursuant to the Trade Name and Service Mark License Agreement (the "License
Agreement"), TCI will grant to the Company, for an initial term of three years
following the Distribution, a non-exclusive non-assignable license to use
certain trade names and service marks specifically identified in the License
Agreement, including the mark "TCI" in the context of the Digital Satellite
Business. The License Agreement will provide, among other things, that all
advertising, promotion and use of certain of TCI's trade names and service
marks by the Company shall be consistent with TCI guidelines and standards, as
well as subject to TCI approval in certain circumstances.
FULFILLMENT AGREEMENT
TCIC has historically provided the Company with certain customer fulfillment
services for PRIMESTAR(R) customers enrolled by the Company's direct sales
force or National Call Center. Charges for such services have been allocated to
the Company by TCIC based on scheduled rates.
Pursuant to the Fulfillment Agreement entered into by TCIC and the Company,
TCIC will continue to provide fulfillment services to the Company following the
Distribution with respect to customers of the PRIMESTAR(R) medium power
service. Such services will include installation, maintenance, retrieval,
inventory
32
<PAGE>
management and other customer fulfillment services. The Fulfillment Agreement
will become effective on the first day of the month following the Distribution
Date. Among other matters, the Fulfillment Agreement (i) sets forth the
responsibilities of TCIC with respect to fulfillment services, including
performance standards and penalties for nonperformance, (ii) provides for
TCIC's fulfillment sites to be connected to the billing and information
systems used by the Company, allowing for on-line scheduling and dispatch of
installation and other service calls, and (iii) provides scheduled rates to be
charged to the Company for the various customer fulfillment services to be
provided by TCIC. The Company retains sole control under the Fulfillment
Agreement to establish the retail prices and other terms and conditions on
which installation and other services will be provided to the Company's
customers. The Fulfillment Agreement also provides that, during the term of
the Fulfillment Agreement, TCIC will not provide fulfillment services to any
other Ku-band, Ka-band, DBS, BSS, FSS, C-band, wireless or other similar or
competitive provider or distributor of television programming services (other
than traditional cable). The Fulfillment Agreement will have an initial term
of two years and is terminable, on 180 days notice to TCIC, by the Company at
any time during the first six months following the Distribution Date. The
scheduled rates for the services to be provided by TCIC under the Fulfillment
Agreement exceed the scheduled rates upon which charges historically have been
allocated to the Company for such services, reflecting in part the value to
the Company, as determined by Company management, of the performance
standards, exclusivity, termination right and certain other provisions
included in the Fulfillment Agreement.
There can be no assurance that the terms of the Fulfillment Agreement are
not more or less favorable than those which could be obtained from
unaffiliated third parties, or that comparable services could be obtained by
the Company from third parties on any terms if the Fulfillment Agreement is
terminated. See "Risk Factors--Relationship with TCI," "Risk Factors--
Potential Conflicts of Interest," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Condensed Pro Forma
Combined Financial Statements of the Company.
TCIC CREDIT FACILITY
TCIC has agreed to make the TCIC Revolving Loans. The terms and conditions
of the Company Note and the TCIC Revolving Loans will be provided for by the
TCIC Credit Facility. The TCIC Revolving Loans and the Company Note will bear
interest at 10% per annum, compounded semi-annually. Commitment fees equal to
3/8% of the average unborrowed availability of TCIC's $500,000,000 commitment
under the TCIC Credit Facility will be payable to TCIC annually. Proceeds from
the TCIC Revolving Loans may be used to fund (i) working capital requirements,
(ii) capital expenditures contemplated by the October 1996 business plan of
the Company, (iii) up to $75,000,000 of other capital expenditures and
investments and (iv) the commitment fees payable under the TCIC Credit
Facility. The TCIC Credit Facility requires the Company to use its best
efforts to obtain external debt or equity financing after the Distribution
Date. The TCIC Credit Facility further provides for mandatory prepayment of
the TCIC Revolving Loans and the Company Note to the extent and in the amount
that the Company has obtained such external financing. Any such prepayment
from the proceeds of external financing is required to be applied first to the
Company Note and then to repay borrowings and correspondingly reduce the
commitments under the TCIC Credit Facility. The outstanding principal of the
TCIC Revolving Loans and the Company Note, together with accrued interest,
will be due and payable on September 30, 2001, the final maturity date of the
TCIC Credit Facility, whether or not sufficient external financing has then
been obtained by the Company. There can be no assurance that the Company will
be able to obtain such external financing on terms acceptable to the Company,
or on any terms, within the time required. Accordingly, the failure of the
Company to refinance the TCIC Credit Facility by the final maturity thereof
could have a material adverse effect on the Company.
Borrowings under the TCIC Credit Facility are subject to, among other
things, (a) the Company's representations and warranties being true and
correct on the date of borrowing, (b) the Company's being in compliance with
its covenants in the TCIC Credit Facility, (c) no default having occurred and
being continuing on the borrowing date or being caused by such borrowing and
(d) the Company's being in compliance, in all material respects, with the
terms and conditions of the Indemnification Agreements, the Transition
Services Agreement, the Reorganization Agreement and the Fulfillment
Agreement. The TCIC Credit Facility sets forth the covenants the Company has
agreed to comply with during the term of the TCIC Credit Facility, including
its covenants (i) not to sell, transfer or otherwise dispose of any asset
(other than sales of inventory in the ordinary
33
<PAGE>
course of business), without the prior written consent of TCIC (other than the
sale of assets or securities of a subsidiary if the aggregate consideration
payable to the seller in respect of such sale is not less than the fair market
value of such assets), (ii) not to merge into or consolidate or combine with
any other person, without the prior written consent of TCIC, (iii) not to
declare or pay any dividend or make any distribution on its capital stock
(other than in common stock), or purchase, redeem or otherwise acquire or
retire for value any capital stock of the Company, (iv) to maintain specified
minimum numbers of qualified subscribers from December 31, 1996 through
December 31, 1997, (v) not to incur indebtedness at any time prior to and
including December 31, 1997 that would exceed a specified amount per qualified
subscriber, (vi) to maintain specified leverage ratios from January 1, 1998
through September 30, 2001, (vii) to maintain specified minimum ratios of
annualized cash flow to annual interest expense,and (viii) to maintain a
specified minimum ratio of annualized cash flow to pro forma debt service.
OTHER ARRANGEMENTS
On or before the Distribution Date, TCI and the Company will enter into an
agreement (the "Share Purchase Agreement") to sell to each other from time to
time, at the then current market price, shares of Series A TCI Group Common
Stock and Series A Common Stock, respectively, as necessary to satisfy their
respective obligations (i) under Adjusted TCI Options and Add-on Company
Options held after the Distribution Date by their respective employees and
non-employee directors and (ii) in connection with any required adjustments to
the TCI Series D Preferred Stock and the Convertible Notes due December 12,
2021, of TCI UA, Inc., as a result of the Distribution.
Certain officers of the Company who were officers or directors of TCI and/or
TCIC prior to the Distribution have received undertakings of indemnification
from TCI and/or TCIC. Such undertakings will survive the Distribution.
In June 1996, the TCI Board authorized TCI to permit certain of its
executive officers to acquire equity interests in certain of TCI's
subsidiaries. In connection therewith, the TCI Board approved the acquisition
by each of Brendan R. Clouston and Larry E. Romrell, executive officers of
TCI, of 1.0% of the net equity of the Company. The TCI Board also approved the
acquisition by Gary S. Howard, an executive officer of TCIC and chief
executive officer and a director of the Company, of 1.0% of the net equity of
the Company and the acquisition by David P. Beddow, an executive officer of
TCITV and a director of the Company, of 0.5% of the net equity of the Company.
The TCI Board determined to structure such transactions as grants to such
persons of options to purchase shares of Series A Common Stock representing
1.0% (in the case of each of Messrs. Clouston, Romrell and Howard) and 0.5%
(in the case of Mr. Beddow) of the shares of Series A Common Stock and Series
B Common Stock issued and outstanding on the Distribution Date, determined
immediately after giving effect to the Distribution, but before giving effect
to any exercise of such options. The aggregate exercise price for each such
option will be equal to 1.0% (in the case of each of Messrs. Clouston, Romrell
and Howard) and 0.5% (in the case of Mr. Beddow) of TCI's Net Investment (as
defined below) as of the first to occur of the Distribution Date and the date
on which such option first becomes exercisable, but excluding any portion of
TCI's Net Investment that as of such date is represented by a promissory note
or other evidence of indebtedness from the Company to TCI. TCI's Net
Investment is defined for this purpose as the cumulative amount invested by
TCI and its predecessor in the Company and its predecessors prior to and
including the applicable date of determination, less the aggregate amount of
all dividends and distributions made by the Company and its predecessors to
TCI and its predecessor prior to and including such date. The options will be
granted on the Distribution Date, will vest in 20% cumulative increments on
each of the first five anniversaries of February 1, 1996, and will be
exercisable for up to ten years following February 1, 1996. Pursuant to the
Reorganization Agreement, and (in the case of the options granted to Messrs.
Clouston, Romrell and Beddow) in partial consideration for the capital
contribution to be made by TCI to the Company in connection with the
Distribution, the Company has agreed, effective as of the Distribution Date,
to bear all obligations under such options and to enter into stock option
agreements with respect to such options (collectively, the "Stock Option
Agreements") with each of Messrs. Clouston, Romrell, Howard and Beddow. See
the Condensed Pro Forma Combined Financial Statements of the Company.
34
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company as of June 30, 1996, and (ii) the pro forma capitalization of the
Company assuming the Distribution and the TCI Intercompany Agreements were
effective on June 30, 1996. See "The Distribution" and "Arrangements Between
TCI and the Company After the Distribution." The table should be read in
conjunction with the pro forma and historical financial statements, including
the notes thereto, of the Company, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------
PRO
HISTORICAL FORMA(1)
---------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Payables, accruals and other operating liabilities...... $ 81,310 81,310
Due to PRIMESTAR Partners............................... 386,219 386,219
TCIC Credit Facility(2):
Company Note.......................................... -- 250,000
TCIC Revolving Loans.................................. -- --
Stock compensation obligation........................... -- 39,500
---------- ---------
Total liabilities................................. 467,529 757,029
---------- ---------
Equity:
Common Stock ($1 par value):
Series A; 185,000,000 shares authorized; 58,437,032
assumed issued on a pro forma basis.............. -- 58,437
Series B; 10,000,000 shares authorized; 8,467,550
assumed issued on a pro forma basis.............. -- 8,468
Additional paid-in capital.............................. -- 376,996
Accumulated deficit..................................... (138,488) (138,488)
Due to TCIC............................................. 722,101 --
---------- ---------
Total equity...................................... 583,613 305,413
---------- ---------
Total liabilities and equity...................... $1,051,142 1,062,442
========== =========
</TABLE>
- --------
(1) For additional information concerning the pro forma adjustments, see the
Condensed Pro Forma Combined Financial Statements of the Company.
(2) For a description of the terms of the TCIC Credit Facility, see
"Arrangements Between TCI and the Company After the Distribution--TCIC
Credit Facility."
35
<PAGE>
SELECTED FINANCIAL DATA
The following table presents summary financial data relating to the
Company's historical financial position and results of operations as of June
30, 1996, and for each of the six month periods ended June 30, 1996 and 1995,
and as of and for each of the years in the five-year period ended December 31,
1995. In addition, the following table presents summary financial data
relating to the Company's unaudited pro forma financial condition as of June
30, 1996, and the Company's unaudited pro forma results of operations for the
six months ended June 30, 1996 and the year ended December 31, 1995. The
historical financial data for each of the years in the three-year period ended
December 31, 1995, and as of December 31, 1995 and 1994, is derived from the
Audited Combined Financial Statements of the Company for the corresponding
periods, which combined financial statements have been audited by KPMG Peat
Marwick LLP, independent auditors. The historical data for the other periods
presented has been derived from unaudited information. The unaudited pro forma
statement of operations data gives effect to the Distribution and the TCI
Intercompany Agreements as of January 1, 1995. The audited pro forma balance
sheet data gives effect to the Distribution and the TCI Intercompany
Agreements as of June 30, 1996. The unaudited pro forma data does not purport
to be indicative of the results of operations or financial position that may
be obtained in the future or that actually would have been obtained had such
transactions occurred on such dates. The following information should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and is qualified in its entirety by
reference to the historical and pro forma combined financial statements,
including the notes thereto, of the Company. For a description of the TCI
Intercompany Agreements, see "Arrangements Between TCI and the Company After
the Distribution."
<TABLE>
<CAPTION>
PRO FORMA(1) HISTORICAL PRO FORMA(1) HISTORICAL
------------ ------------------ ------------ -----------------------------------------
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------------- ------------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
------------ --------- ------- ------------ -------- ------- ------ ------ ------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY STATEMENT OF
OPERATIONS DATA:
Revenue................. $ 193,647 $ 193,647 61,611 208,902 208,902 30,279 11,679 4,614 165
Operating, selling,
general and
administrative
expenses............... (187,936) (186,625) (56,717) (211,455) (214,116) (25,107) (7,069) (2,268) (280)
Depreciation............ (96,160) (83,230) (26,625) (76,128) (68,233) (18,903) (6,513) (2,602) (283)
--------- --------- ------- -------- -------- ------- ------ ------ ------
Operating loss......... (90,449) (76,208) (21,731) (78,681) (73,447) (13,731) (1,903) (256) (398)
Share of losses of
PRIMESTAR Partners..... (1,446) (1,446) (4,988) (8,969) (8,969) (11,722) (5,524) (4,561) (5,146)
Other, net.............. 23,462 25,266 9,867 14,608 27,514 9,677 3,491 2,046 906
--------- --------- ------- -------- -------- ------- ------ ------ ------
Net Loss............... $ (68,433) (52,388) (16,852) (73,042) (54,902) (15,776) (3,936) (2,771) (4,638)
========= ========= ======= ======== ======== ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------
JUNE 30, 1996 DECEMBER 31,
----------------------- ------------------------------------
PRO FORMA(1) HISTORICAL 1995 1994 1993 1992 1991
------------ ---------- ------- ------- ------- ------ -----
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET
DATA:
Property and equipment,
net.................... $1,000,669 1,000,669 871,888 393,212 95,323 15,791 1,776
========== ========= ======= ======= ======= ====== =====
Investment in, and
related advances to
PRIMESTAR Partners..... $ 28,847 28,847 17,963 9,793 19,625 485 213
========== ========= ======= ======= ======= ====== =====
Total assets............ $1,062,442 1,051,542 916,111 405,519 115,653 16,843 2,154
========== ========= ======= ======= ======= ====== =====
Due to PRIMESTAR
Partners............... $ 386,219 386,219 382,900 278,772 71,164 -- --
========== ========= ======= ======= ======= ====== =====
Company Note............ $ 250,000 -- -- -- -- -- --
========== ========= ======= ======= ======= ====== =====
Stock compensation
obligation............. $ 39,500 -- -- -- -- -- --
========== ========= ======= ======= ======= ====== =====
Equity.................. $ 305,413 583,613 470,686 117,837 42,507 15,797 2,109
========== ========= ======= ======= ======= ====== =====
</TABLE>
- --------
(1) For additional information concerning the pro forma adjustments, see the
Condensed Pro Forma Combined Financial Statements of the Company.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis provides information concerning the
financial condition and results of operations of the Company and should be
read in conjunction with the Company's historical and pro forma combined
financial statements.
SUMMARY OF OPERATIONS
As described in greater detail below, the Company reported net losses of
$52,388,000 and $16,852,000 during the six months ended June 30, 1996 and
1995, respectively, and $54,902,000, $15,776,000 and $3,936,000 during the
years ended December 31, 1995, 1994 and 1993, respectively. Improvements in
the Company's results of operations are largely dependent upon its ability to
increase its customer base while maintaining its pricing structure, reducing
subscriber churn and effectively managing the Company's costs. No assurance
can be given that any such improvements will occur. In addition, the Company
incurs significant sales commission and installation costs when its customers
initially subscribe to the service. Accordingly, management expects that
operating costs will remain high as a percentage of revenue so long as the
Company maintains its rapid growth in subscribers. The high cost of obtaining
new subscribers also magnifies the negative effects of subscriber churn.
Since July 1994, when PRIMESTAR Partners completed its conversion from an
analog to a digital signal, the Company has experienced significant growth in
Authorized Units. In this regard, the number of Authorized Units was 659,000
and 220,000 at June 30, 1996 and 1995, respectively, and 535,000, 100,000 and
35,000 at December 31, 1995, 1994 and 1993, respectively. To the extent not
otherwise described, increases in the Company's revenue and operating,
selling, general and administrative expenses, as detailed below, are primarily
related to such growth in Authorized Units. The Company is operating in an
increasingly competitive environment. No assurance can be given that such
increasing competition will not adversely affect the Company's ability to
continue to achieve significant growth in Authorized Units and revenue. See
"Risk Factors--Competitive Nature of the Industry" and "Business of the
Company--Competition."
TCIC has historically provided the Company with certain customer fulfillment
services for PRIMESTAR(R) customers enrolled by the Company's direct sales
force or National Call Center. Charges for such services have been allocated
to the Company by TCIC based on scheduled rates. TCIC will continue to provide
fulfillment services to the Company following the Distribution with respect to
customers of the PRIMESTAR(R) medium power service, pursuant to the
Fulfillment Agreement. Such services will include installation, maintenance,
retrieval, inventory management and other customer fulfillment services. The
Fulfillment Agreement, which will become effective on the first day of the
month following the Distribution Date, provides for, among other matters, (i)
the responsibilities of TCIC with respect to fulfillment services, including
performance standards and penalties for nonperformance, (ii) TCIC's
fulfillment sites to be connected to the billing and information systems used
by the Company, allowing for on-line scheduling and dispatch of installation
and other service calls, and (iii) scheduled rates to be charged to the
Company for the various customer fulfillment services to be provided by TCIC.
The Fulfillment Agreement also provides that, during its term, TCIC will not
provide fulfillment services to certain other providers or distributors of
television programming services. The Fulfillment Agreement will have an
initial term of two years, and is terminable, on 180 days notice to TCIC, by
the Company at any time during the first six months following the Distribution
Date. There can be no assurance that the terms of the Fulfillment Agreement
are not more or less favorable than those which could be obtained from
unaffiliated third parties, or that comparable services could be obtained by
the Company from third parties on any terms if the Fulfillment Agreement is
terminated. See "Risk Factors--Relationship with TCI" and "Risk Factors--
Potential Conflicts of Interest."
Installation charges from TCIC include direct and indirect costs of
performing installations. The Company has capitalized a portion of such
charges based upon amounts charged by unaffiliated third parties to perform
similar services. Following the Distribution, the Company will capitalize the
full amount of installation fees paid
37
<PAGE>
to TCIC pursuant to the Fulfillment Agreement. Additionally, the scheduled
rates for the services to be provided by TCIC under the Fulfillment Agreement
exceed the scheduled rates upon which charges, historically, have been
allocated to the Company for such services, reflecting in part the value to
the Company, as determined by Company management, of the performance
standards, exclusivity, termination right and certain other provisions
included in the Fulfillment Agreement. For information concerning the pro
forma effect of the Fulfillment Agreement, see the Condensed Pro Forma
Combined Financial Statements of the Company.
In connection with the Distribution, the Company and TCI also will enter
into the Transition Services Agreement, the Stock Option Agreements and the
TCIC Credit Facility. In general, such agreements will result in increases in
the expenses to be incurred by the Company following the Distribution, as
compared to the amounts allocated to the Company by TCI prior to the
Distribution. For information concerning the pro forma effects of such
agreements, see the Condensed Pro Forma Combined Financial Statements of the
Company.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Certain financial information concerning the Company's operations is
presented below (dollar amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------
1996 1995
-------------------- -------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
AMOUNT REVENUE AMOUNT REVENUE
-------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Revenue:
Programming and equipment rental..... $156,870 81% 37,362 61%
Installation......................... 36,777 19 24,249 39
-------- --- ------- ---
Total revenue...................... 193,647 100 61,611 100
-------- --- ------- ---
Operating costs and expenses:
Charges from PRIMESTAR Partners:
Programming......................... (57,463) (30) (14,309) (23)
Satellite, marketing and distribu-
tion............................... (29,422) (15) (7,387) (12)
-------- --- ------- ---
(86,885) (45) (21,696) (35)
Other operating:
Allocations from TCIC............... (10,505) (5) (7,136) (12)
Other............................... (4,345) (2) (705) (1)
-------- --- ------- ---
(14,850) (7) (7,841) (13)
Selling, general and administrative:
Selling and marketing............... (49,987) (26) (18,967) (31)
Bad debt............................ (9,779) (5) (1,432) (2)
Allocations from TCIC............... (9,576) (5) (2,223) (4)
Other general and administrative.... (15,548) (8) (4,558) (7)
-------- --- ------- ---
(84,890) (44) (27,180) (44)
-------- --- ------- ---
Operating Cash Flow(1).............. 7,022 4 4,894 8
Depreciation......................... (83,230) (43) (26,625) (43)
-------- --- ------- ---
Operating loss...................... $(76,208) (39%) (21,731) (35%)
======== === ======= ===
</TABLE>
- --------
(1) Operating Cash Flow is a commonly used measure of value and borrowing
capacity within the Company's industry, and is not intended to be a
substitute for a measure of performance in accordance with generally
accepted accounting principles and should not be relied upon as such.
Revenue increased $132,036,000 or 214% during the six months ended June 30,
1996, as compared to the corresponding prior year period. Exclusive of
installation revenue, the Company's average monthly revenue per
38
<PAGE>
Authorized Unit increased from $39 during the 1995 period to $44 during the
1996 period. Such increase occurred as the positive effects of (i) an increase
in the average monthly revenue derived from premium and pay-per-view services,
and (ii) a March 1995 increase in the monthly equipment rental fee more than
offset the effects of a second quarter promotional campaign that provided
certain new customers with one month of free service.
PRIMESTAR Partners provides programming services to the Company and other
authorized distributors in exchange for a fee based upon the number of
Authorized Units receiving the respective programming services. PRIMESTAR
Partners also arranges for satellite capacity and uplink services, and provides
national marketing and administrative support services, in exchange for a
separate authorization fee from each distributor, including the Company, based
on such distributor's total number of Authorized Units. The aggregate charges
for such programming and other services increased $65,189,000 or 300% during
the six months ended June 30, 1996, as compared to the corresponding prior year
period. The average aggregate monthly amount per Authorized Unit charged by
PRIMESTAR Partners increased from $22 during the 1995 period to $24 during the
1996 period. For additional information concerning the operations of PRIMESTAR
Partners, see related discussion below.
Other operating costs and expenses, which are primarily comprised of amounts
related to customer fulfillment activities, increased $7,009,000 or 89% during
the six months ended June 30, 1996, as compared to the corresponding prior year
period. Most of such operating costs and expenses were allocated from TCIC to
the Company based upon a standard charge for each of the various customer
fulfillment activities performed by TCIC. As discussed above, TCIC and the
Company have entered into a Fulfillment Agreement with respect to installation,
maintenance, retrieval and other customer fulfillment services to be provided
by TCIC following the Distribution. See the Condensed Pro Forma Combined
Financial Statements of the Company.
Selling, general and administrative expenses increased $57,710,000 or 212%
during the six months ended June 30, 1996, as compared to the corresponding
prior year period. Selling and marketing expenses, which represented 26% of
revenue during the 1996 period, include sales commissions, marketing and
advertising expenses, and costs associated with the operation of a customer
service call center. Bad debt expense represented 5% of revenue during the 1996
period. The Company is attempting to reduce the percentage of revenue
represented by selling, marketing and bad debt expenses. No assurance can be
given that such attempts will be successful.
General and administrative allocations from TCIC are generally based upon the
estimated cost of the general and administrative services provided to the
Company. Following the Distribution, charges for administrative services
provided by TCIC will be made pursuant to the Transition Services Agreement.
For information concerning the pro forma effect of the Transition Services
Agreement, see the Condensed Pro Forma Combined Financial Statements of the
Company.
The $56,605,000 or 213% increase in depreciation during the six months ended
June 30, 1996, as compared to the corresponding prior year period, is the
result of increases in the Company's depreciable assets due primarily to
capital expenditures with respect to the Company's satellite reception
equipment. See the Condensed Pro Forma Combined Financial Statements of the
Company.
The Company's share of PRIMESTAR Partners' net losses decreased $3,542,000 or
71% during the six months ended June 30, 1996, as compared to the corresponding
prior year period. Such decrease is primarily attributable to a significant
increase in the revenue derived by PRIMESTAR Partners' from the Company and
other distributors of PRIMESTAR Partners' programming. Historically, PRIMESTAR
Partners' operating deficits have been funded by capital contributions from the
Company and the other partners of PRIMESTAR Partners. To the extent that future
Authorized Unit growth does not generate increases in PRIMESTAR Partners'
revenue sufficient to offset its operating costs and expenses, the Company
anticipates that any such operating deficit would be funded by PRIMESTAR
Partners' then existing external sources of liquidity (which may include
capital contributions from the Company and PRIMESTAR Partners' other partners),
or by increases in the above-described programming and authorization fees
charged by PRIMESTAR Partners to the Company and other authorized distributors.
39
<PAGE>
The Company's income tax benefit was $25,073,000 and $9,724,000 during the
six months ended June 30, 1996 and 1995, respectively. The effective tax rate
associated with such benefits was 32% and 37%, respectively. In connection
with the Distribution, the Company expects to become a party to the Tax
Sharing Agreement that currently exists among TCI, TCIC and certain other
subsidiaries of TCI. The Company's income tax benefits include intercompany
allocations from TCI of current income tax benefits of $25,073,000 and
$6,337,000 during the six months ended June 30, 1996 and 1995, respectively.
Following the Distribution the Company will cease to be a part of the TCI
consolidated tax group, and will only be able to realize current income tax
benefits to the extent that the Company generates taxable income. During the
first several years following the Distribution, the Company believes that it
will incur net losses for income tax purposes, and accordingly, will not be in
a position to realize income tax benefits on a current basis. For additional
information, see note 7 to the Audited Combined Financial Statements of the
Company.
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Certain financial information concerning the Company's operations is
presented below (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993
--------------------- ------------------- ------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL OF TOTAL
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
--------- ---------- ------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Programming and equip-
ment rental........... $ 133,688 64% 18,641 62% 9,075 78%
Installation........... 75,214 36 11,638 38 2,604 22
--------- --- ------- --- ------ ---
Total revenue......... 208,902 100 30,279 100 11,679 100
--------- --- ------- --- ------ ---
Operating costs and ex-
penses:
Programming, satellite,
marketing and distri-
bution charges from
PRIMESTAR Partners.... (78,250) (37) (11,632) (38) (4,445) (38)
Other operating:
Allocations from TCIC.. (15,916) (8) (4,368) (14) (1,577) (14)
Other.................. (1,884) (1) -- -- -- --
--------- --- ------- --- ------ ---
(17,800) (9) (4,368) (14) (1,577) (14)
Selling, general and
administrative:
Selling and marketing.. (81,763) (39) (1,777) (6) (54) --
Bad debt............... (10,549) (5) (1,529) (5) (30) --
Allocations from TCIC.. (7,817) (4) (1,080) (4) (795) (7)
Other general and ad-
ministrative.......... (17,937) (8) (4,721) (16) (168) (1)
--------- --- ------- --- ------ ---
(118,066) (56) (9,107) (31) (1,047) (8)
--------- --- ------- --- ------ ---
Operating Cash Flow
(deficit)............ (5,214) (2) 5,172 17 4,610 40
Depreciation........... (68,233) (33) (18,903) (62) (6,513) (56)
--------- --- ------- --- ------ ---
Operating loss........ $ (73,447) (35%) (13,731) (45%) (1,903) (16%)
========= === ======= === ====== ===
</TABLE>
- --------
(1) Operating Cash Flow is a commonly used measure of value and borrowing
capacity within the Company's industry, and is not intended to be a
substitute for a measure of performance in accordance with generally
accepted accounting principles and should not be relied upon as such.
Revenue increased $178,623,000 or 590% and $18,600,000 or 159% during 1995
and 1994, as compared to the corresponding prior year period. Exclusive of
installation revenue, the Company's average monthly revenue per Authorized
Unit was $41, $28 and $27 during 1995, 1994 and 1993, respectively. The 46%
increase in the average monthly revenue per Authorized Unit from 1994 to 1995
is primarily attributable to (i) the full year
40
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effect of the higher basic service rates and the increased availability of
premium and pay-per-view services that followed the July 1994 completion of the
conversion from an analog to a digital signal, and (ii) a March 1995 increase
in the monthly equipment rental fee.
Programming, satellite, marketing and distribution charges from PRIMESTAR
Partners increased $66,618,000 or 573% and $7,187,000 or 162% during 1995 and
1994, respectively, as compared to the corresponding prior year periods. The
average aggregate monthly amount per Authorized Unit charged by PRIMESTAR
Partners was $24, $17 and $13 during 1995, 1994 and 1993, respectively. In
general, such increases reflect the higher programming, satellite and national
marketing expenses that PRIMESTAR Partners began to incur following the July
1994 completion of the conversion from an analog to a digital signal.
Other operating expenses increased $13,432,000 or 308% and $2,791,000 or 177%
during 1995 and 1994, respectively, as compared to the corresponding prior year
periods. Most of such operating costs and expenses were allocated from TCIC to
the Company based upon a standard charge for each of the various customer
fulfillment activities performed by TCIC. As discussed above, TCIC and the
Company have entered into a Fulfillment Agreement with respect to installation,
maintenance, retrieval and other customer fulfillment services to be provided
by TCIC following the Distribution. See the Condensed Pro Forma Combined
Financial Statements of the Company.
Selling, general and administrative expenses increased $108,959,000 or 1,196%
and $8,060,000 or 770% during 1995 and 1994, respectively, as compared to the
corresponding prior year periods. In 1995, selling and marketing expenses
represented 39% of revenue and bad debt expense represented 5% of revenue. Such
relatively high percentages are attributable to the Company's efforts to
increase its subscriber base.
General and administrative allocations from TCIC are generally based upon the
estimated cost of the general and administrative services provided to the
Company. Following the Distribution, charges for administrative services
provided by TCIC will be made pursuant to the Transition Services Agreement.
For information concerning the pro forma effect of the Transition Services
Agreement, see the Condensed Pro Forma Combined Financial Statements of the
Company.
The $49,330,000 or 261% and $12,390,000 or 190% increases in depreciation
during 1995 and 1994, respectively, as compared to the corresponding prior year
periods, are the result of increases in the Company's depreciable assets due
primarily to capital expenditures with respect to the Company's satellite
reception equipment. See the Condensed Pro Forma Combined Financial Statements
of the Company.
The Company's 20.86% share of PRIMESTAR Partners' net losses decreased
$2,753,000 or 23% and increased $6,198,000 or 112% during 1995 and 1994,
respectively, as compared to the corresponding prior year periods. For
additional information concerning PRIMESTAR Partners' operations, see related
discussion above.
The Company's income tax benefit was $27,208,000, $9,371,000 and $3,403,000
during 1995, 1994 and 1993, respectively. The effective tax rates associated
with such benefits were 33%, 37% and 46%, respectively. The Company's income
tax benefits include intercompany allocations from TCI of current income tax
benefits of $35,735,000, $9,371,000 and $3,403,000 during 1995, 1994 and 1993
respectively. As described above, during the first several years following the
Distribution, the Company believes that it will not be in a position to realize
current income tax benefits. For information concerning the Tax Sharing
Agreement, see note 7 to the Audited Combined Financial Statements of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
In recent periods, the Company has relied upon non-interest bearing advances
from TCI in order to fund the majority of the Company's working capital
requirements and capital expenditures. During the six months ended June 30,
1996, and the year ended December 31, 1995, such advances aggregated
$165,491,000 and $398,323,000, respectively. Following the Distribution, it is
anticipated that TCIC will provide the Company
41
<PAGE>
with funding pursuant to the TCIC Credit Facility, subject to the Company's
best efforts obligations to refinance the TCIC Credit Facility. Following the
termination of the TCIC Credit Facility, whether at maturity or in connection
with any such refinancing, it is not expected that TCI will continue to be a
source of long-term financing for the Company. For a description of the terms
of the TCIC Credit Facility, see "Arrangements Between TCI and the Company
After the Distribution-- TCIC Credit Facility."
The Company also has relied upon advances from PRIMESTAR Partners to finance
the majority of the cost of constructing the Company Satellites. Such
advances, which aggregate $386,219,000 at June 30, 1996, are reflected as a
liability in the combined balance sheets included in the historical combined
financial statements of the Company. PRIMESTAR Partners financed such advances
to the Company through borrowings under the PRIMESTAR Credit Facility, which
was in turn supported by letters of credit arranged for by affiliates of all
but one of the partners of PRIMESTAR Partners. PRIMESTAR Partners'
indebtedness under the PRIMESTAR Credit Facility aggregated $433,000,000 at
June 30, 1996. The Company expects that the amount due to PRIMESTAR Partners
will be settled through the sale or lease of all the DBS capacity of the
Company Satellites. The ultimate settlement of the amounts advanced from
PRIMESTAR Partners is dependent, in part, on the outcome of certain
uncertainties. For additional information concerning such uncertainties, see
"Risk Factors--Alternative Strategies for Deployment of High Power
Satellites," "Risk Factors--Risks of Adverse Government Regulations and
Adjudications" and "Business of the Company--High Power Satellites."
During the six months ended June 30, 1996, and the year ended December 31,
1995, the Company's operating activities provided cash of $60,078,000 and
$63,398,000, respectively. Most of the cash provided by the Company's
operating activities during such periods is attributable to the intercompany
allocation of current income tax benefits from TCI, and to changes in the
Company's receivables, prepaids, accruals and payables and subscriber advance
payments ("Operating Assets and Liabilities"). As described above, during the
first several years following the Distribution, the Company believes that it
will not be in a position to realize income tax benefits on a current basis.
In addition, the timing and amount of changes in the balances of the Company's
Operating Assets and Liabilities are subject to a variety of factors, certain
of which are outside of the control of, or not easily predicted by, the
Company. Exclusive of the effects of intercompany allocations of current
income tax benefits, and changes in the Company's Operating Assets and
Liabilities, the Company's operating activities provided (used) cash of
$7,052,000 and $(4,007,000) during the six months ended June 30, 1996, and
year ended December 31, 1995, respectively. For the first several years
following the Distribution, the Company believes that its operating activities
will represent a reliable source of liquidity only to the extent that the
Company is able to generate Operating Cash Flow.
During the six months ended June 30, 1996, and the year ended December 31,
1995, the Company used cash of $36,684,000 and $104,128,000, respectively, to
fund the cost of constructing the Company Satellites and $175,340,000 and
$442,781,000, respectively, to fund (i) the acquisition and installation of
satellite reception equipment, and (ii) certain other capital expenditures.
See the combined statements of cash flows included in the historical combined
financial statements of the Company. The amount of capital required to fund
the acquisition and installation of satellite reception equipment in the
future will be primarily a function of (i) subscriber growth and churn rates,
and (ii) the outcome of the uncertainties associated with the deployment of
the Company Satellites. See "Risk Factors--Alternative Strategies for
Deployment of High Power Satellites." As described above the scheduled rates
for the services to be provided by TCIC pursuant to the Fulfillment Agreement
exceed the schedule rates upon which charges, historically, have been
allocated to the Company for such services prior to the Distribution. In this
regard, the installation charges allocated to the Company by TCIC aggregated
$28,212,000 and $69,154,000 during the six months ended June 30, 1996 and the
year ended December 31, 1995, respectively. If the Fulfillment Agreement had
been in effect on January 1, 1995, the estimated installation fees payable by
the Company to TCIC would have been $37,177,000 and $91,021,000 during the six
months ended June 30, 1996 and the year ended December 31, 1995, respectively.
The amount payable in future periods by the Company to TCIC under the
Fulfillment Agreement will be dependent upon the level of fulfillment services
provided by TCIC to the Company. See the Condensed Pro Forma Combined
Financial Statements of the Company.
42
<PAGE>
At June 30, 1996, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $56,000,000.
As part of the compensation paid to the Company's four master sales agents,
the Company has agreed to pay certain residual sales commissions equal to a
percentage of the programming collected from subscribers installed by such
master sales agents during specified periods following the initiation of
service (generally five years). During the six months ended June 30, 1996, and
the year ended December 31, 1995, residual payments to such master sales agents
aggregated $4,597,000 and $2,178,000, respectively.
PRIMESTAR Partners currently broadcasts from K-1, a medium power satellite
that is nearing the end of its operational life. Although the Company believes
that a replacement satellite will be successfully deployed prior to the
expiration of K-1's operational life, such deployment is dependent on a number
of factors that are outside of the Company's control and no assurance can be
given as to the successful deployment of a replacement satellite. The failure
to deploy a fully operational replacement satellite by the end of K-1's
operational life (or the operational life of any temporary in-orbit replacement
that might be available) could have a material adverse effect on both the
Company and PRIMESTAR Partners. See "Risk Factors--Risks of Failure or Delay in
Launch of GE-2--Risks of Satellite Defect, Loss or Reduced Performance," "Risk
Factors--Risks of Failure or Delay in Launch of GE-2--Risk of Inclined Orbit
Operations" and "Business of the Company-- PRIMESTAR By TCI--The PRIMESTAR(R)
Service."
On or before the Distribution Date, the Company will enter into the
Indemnification Agreements with TCIC, TCITV and TCI UA 1. The Indemnification
Agreement with TCIC will provide for the Company to reimburse TCIC for any
amounts drawn under an irrevocable transferable letter of credit issued by the
Bank of New York for the account of TCIC to support the Company's share of
PRIMESTAR Partners' obligations under the GE-2 Agreement. The original drawable
amount of such letter of credit is $25,000,000, increasing to $75,000,000 if
PRIMESTAR Partners exercises its option under the GE-2 Agreement to extend the
term of such agreement for the remainder of the useful life of GE-2. See "Risk
Factors--Risks of Failure or Delay in Launch of GE-2--Risks of Satellite
Defect, Loss or Reduced Performance," and "Business of the Company--PRIMESTAR
by TCI--The PRIMESTAR(R) Service."
The Indemnification Agreement with TCITV will provide for the Company to
indemnify and hold harmless TCITV and certain related persons from and against
any losses, claims and liabilities arising out of certain agreements relating
to the proposed Telesat Transaction, which TCITV will assign to the Company in
connection with the Distribution. The Indemnification Agreement with TCI UA 1
will provide for the Company to reimburse TCI UA 1 for any amounts drawn under
the TCI UA 1 Letter of Credit, which supports the PRIMESTAR Credit Facility
that was obtained by PRIMESTAR Partners to finance advances to Tempo for
payments due in respect of the Company Satellites and that is supported by
letters of credit arranged for by affiliates of the partners of the Partnership
(other than GEAS).
The TCIC and TCI UA 1 Indemnification Agreements further provide for the
Company to indemnify and hold harmless TCIC and TCI UA 1, respectively, and
certain related persons from and against any losses, claims, and liabilities
arising out of the respective letters of credit or any drawings thereunder. The
payment obligations of the Company to TCIC and TCI UA1, respectively, under
such Indemnification Agreements will be subordinated in right of payment with
respect to certain future obligations of the Company to financial institutions.
At June 30, 1996, the Company had guaranteed approximately $4,200,000 of
certain minimum commitments of PRIMESTAR Partners to purchase satellite
reception equipment.
Under the PRIMESTAR Partnership Agreement, the Company has agreed to fund its
share of any capital contributions and/or loans to PRIMESTAR Partners that
might be agreed upon from time to time by the partners
43
<PAGE>
of PRIMESTAR Partners. Additionally, those subsidiaries of the Company that
are general partners of PRIMESTAR Partners are liable as a matter of
partnership law for all debts of PRIMESTAR Partners in the event the
liabilities of PRIMESTAR Partners were to exceed its assets. The Company has
additional contingent liabilities related to PRIMESTAR Partners. See note(s)
4, 5 and 7 to the Unaudited Combined Financial Statements of the Company.
The Company has agreed to bear all obligations with respect to stock options
that will be granted on the Distribution Date pursuant to the Stock Option
Agreements. Based upon preliminary estimates of (i) the market value of the
shares underlying the Stock Option Agreements and (ii) the exercise price that
would have been calculated if the stock options evidenced by the Stock Option
Agreements were granted on June 30, 1996, the Company estimates that the pro
forma stock compensation obligation associated with the Stock Option
Agreements would have been $39,500,000 at June 30, 1996. Such obligation will
be settled by the Company's issuance of Series A Common Stock to the extent
options are exercised in accordance with the terms of the Stock Option
Agreements. For additional information, see "Arrangements Between TCI and the
Company After the Distribution--Other Arrangements," and the Condensed Pro
Forma Combined Financial Statements of the Company.
Effective as of October 21, 1996, the Company acquired 4.99% of the issued
and outstanding capital stock of ResNet Communications, Inc., a Delaware
corporation ("ResNet"), which, prior to the investment by the Company, was a
wholly owned subsidiary of LodgeNet Entertainment Corporation, a Delaware
corporation ("LodgeNet"). ResNet was formed by LodgeNet in February 1996 to
engage in the business of operating as a "private cable operator" under
applicable federal law, providing video on demand, basic and premium cable
television programming, and other interactive, multi-media entertainment and
information services to subscribers in multiple dwelling units with facilities
that do not use any public right-of-way (the "ResNet Business"). ResNet agreed
to purchase from the Company up to $40 million in satellite-reception
equipment, to be used in connection with the ResNet Business exclusively over
a five-year period (subject to a one-year extension at the option of ResNet if
ResNet has not purchased the full $40 million in equipment during the five-
year initial term). The Company also agreed to make a subordinated convertible
term loan to ResNet, the proceeds of which can be used only to purchase such
equipment from the Company. The term of the loan is five years with an option
by ResNet to extend the term for one additional year. The total principal and
accrued and unpaid interest under the loan is convertible over a four-year
period into shares of common stock of ResNet that will provide the Company
with the right to acquire an additional 32% of the issued and outstanding
common stock of ResNet. The Company's only recourse with respect to repayment
of the loan is conversion into ResNet stock or warrants as described below.
Under current interpretations of the FCC rules and regulations related to
restrictions on cross-ownership of cable and satellite master antenna
television operations, the Company would be prohibited from holding 5% or more
of the stock of ResNet and consequently could not exercise the conversion
rights under the convertible loan agreement. The Company is required to
convert the convertible loan at such time as conversion would not violate such
currently applicable regulatory restrictions. In addition, ResNet granted the
Company an option to acquire an additional 13.01% of the issued and
outstanding common stock of ResNet at appraised fair market value at the time
of exercise of the option. The option is exercisable between December 21, 1999
and the maturity of the convertible loan. Upon the maturity date of the
convertible loan, if the Company has been prevented from converting the loan
or exercising the option in full due to the previously described regulatory
restriction, ResNet will issue warrants to the Company to acquire the stock
that has not been issued pursuant to conversion of the loan and the stock that
the Company has a right to acquire by exercise of the option. The exercise
price of the warrants to be issued in respect of the convertible loan will be
de minimus, and the exercise price of the warrants to be issued in respect of
the option will be equivalent to the exercise price under such option. The
Company has agreed to customary standstill provisions with respect to
acquisitions of more than 10% of the outstanding stock of LodgeNet and any
additional shares of ResNet. For additional information concerning the ResNet
Transaction, see "Business of the Company--PRIMESTAR By TCI--ResNet
Transaction."
Following the Distribution, the Company will require significant additional
capital to meet its operating plan. Such capital will be used primarily to
purchase additional inventory of satellite reception equipment for
44
<PAGE>
sale or rental to subscribers, to finance the cost of installing new customers
and to provide for working capital and other liquidity requirements that may
arise.
As described above, the TCIC Credit Facility is intended to provide the
Company with a source of liquidity until such time as the Company is able to
arrange for permanent financing. In this regard, the Company currently is
seeking to arrange for a possible bank financing and may, in the future seek to
obtain additional financing through an institutional private placement, a
public offering of debt securities or a combination of such sources. The
Company anticipates that it will use proceeds from any bank or other permanent
financing, together with any net cash provided by operations, to (i) repay all
amounts due under the TCIC Credit Facility and (ii) fund the Company's
projected liquidity requirements for the next eighteen months. Although the
Company believes that it will be able to obtain such permanent financing, there
can be no assurance that this will be the case. Additionally, faster-than-
anticipated subscriber growth or other contingencies may require additional
financing. The Company expects that, if additional financing is needed, it
would seek to obtain such financing through the capital markets, including the
high-yield debt market. No assurance can be given however that such additional
financing would be available on terms satisfactory to the Company, or that
sufficient financing to meet the Company's needs would be available on any
terms.
The degree to which the Company becomes leveraged may adversely affect the
Company's ability to compete effectively against better capitalized competitors
and to withstand downturns in its business or the economy generally, and could
limit its ability to pursue business opportunities that may be in the interests
of the Company and its stockholders. The Company's ability to service its debt
will require growth in the Company's Operating Cash Flow. There can be no
assurance that the Company will be successful in increasing its Operating Cash
Flow by a sufficient magnitude or in a timely manner or in raising additional
equity or debt financing to enable it to meet its debt service requirements. In
addition, a failure of the Company to have adequate access to capital may
adversely affect the Company's ability, or choice, to launch proposed products
and services in the time frames discussed herein. See "Risk Factors--Dependence
on Additional Capital; Substantial Leverage" and "Risk Factors--Limited
Operating History; Operating Losses of the Company."
45
<PAGE>
BUSINESS OF THE COMPANY
GENERAL
The Company was formed in connection with the Distribution to own and
operate certain businesses of the TCI Group constituting all of the TCI
Group's interests in the Digital Satellite Business. At the time of the
Distribution, TCI will cause to be transferred to the Company and its
subsidiaries the ownership interests in (i) the business of distributing
PRIMESTAR(R), known as PRIMESTAR By TCI, which as of June 30, 1996 had an
installed base of approximately 659,000 Authorized Units, (ii) an aggregate
20.86% partnership interest in PRIMESTAR Partners, (iii) Tempo, which holds
TCI's high power satellite interests, and (iv) TCI's rights under the
Operating Services Agreement, dated as of May 6, 1996 between Telesat and
TCITV, a subsidiary of TCI (the "Operating Services Agreement"), and related
agreements with Telesat.
TCI, through various subsidiaries, has been engaged in the business of
distributing PRIMESTAR(R) since December 1990. TCI Digital Satellite
Entertainment, Inc., a Colorado corporation ("Digital"), was incorporated in
February 1995 in order to consolidate the PRIMESTAR By TCI distribution
business into one subsidiary. In connection with the Distribution, Digital
will be merged with and into the Company, as a means of reincorporating
Digital in Delaware.
OVERVIEW OF DIGITAL SATELLITE TELEVISION INDUSTRY
Digital satellite television services use communications satellites,
broadcasting at Ku-band or higher frequencies, to transmit multichannel video
programming directly to consumers, who receive such signals on home satellite
dishes or HSDs. Such satellites operate in geosynchronous orbit above the
equator, from orbital positions or "slots" allocated by international
agreement to the U.S. and other national governments and assigned by such
governments in accordance with local law. Orbital slots are designated by
their location East or West of the zero meridian, measured in degrees of
longitude, and comprise both a physical location and an assignment of
broadcast spectrum in the applicable frequency band, divided into 32 frequency
channels, each with a useable bandwidth of 24 MHZ. Such frequency channels are
sometimes referred to as "transponders" because each transponder on a
satellite generally transmits on one of such channels. With digital
compression technology, each frequency channel can be converted on average
into five or more analog channels of programming, thereby enabling the digital
satellite service operator to offer a broader variety of programming choices
than analog satellite systems and enabling subscribers of digital satellite
services to receive laser disc-quality picture and compact disc-quality sound
from the satellite.
The operator of a digital satellite television service typically enters into
agreements with programmers, who deliver their programming content to the
digital satellite service operator via commercial satellites, fiber optics or
microwave transmissions. The digital satellite service operator generally
monitors such signals for quality, and may add promotional messages, public
service programming or other system-specific content. The signals are then
digitized, compressed, encrypted and combined with other programming sharing a
given transponder and other necessary data streams (such as conditional access
information). Each transponder's signal is then uplinked, or transmitted, to
the transponder owned or leased by the service operator on the service's
satellite, which receives and transmits the signal to HSDs configured to
receive it.
In order to receive the programming, a subscriber requires (i) a properly
installed HSD, which includes an antenna (i.e., a dish), LNB and related
equipment. (ii) an integrated receiver/decoder ("IRD," sometimes referred to
herein as the "satellite receiver" or "set-top box"), which receives the data
stream from each broadcasting transponder, separates it into separate digital
programming signals, decrypts and decompresses those signals that the
subscriber is authorized to receive and converts such digital signals into
analog radio frequency signals, and (iii) a television set, to view and listen
to the programming contained in such analog signals. A subscriber's IRD is
generally connected to the digital satellite service operator's authorization
center by telephone, to report the purchase of premium and pay-per-view
channels.
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<PAGE>
The FCC authorizes two types of satellite services for transmission of
television programming: Broadcast Satellite Service ("BSS"), which operates at
high power (120 to 240 watts per channel) in the Ku-band, and Fixed Satellite
Service ("FSS"), which includes medium power (20 to 100 watts per channel)
services transmitting in the Ku-band, as well as low power services
transmitting in the C-band. Both high power BSS satellites and medium power
FSS satellites are used for digital satellite television services. High power
signals can be received by HSDs of approximately 18 inches in diameter, while
medium power signals require HSDs of 27 to 39 inches in diameter (depending on
the geographical location of the HSD). However, both high power and medium
power digital satellite services provide the same high video and audio
quality.
MARKET FOR DIGITAL SATELLITE SERVICES
The Company believes that the market for digital satellite products and
services is growing and that there is significant unsatisfied demand for high
quality, reasonably priced television programming. According to industry
sources, there are approximately 96 million television households in the U.S.
and it is estimated that approximately 63 million cable subscribers pay an
average of approximately $33 per month for multichannel programming services.
The Company believes, therefore, that the potential market in the U.S. for
video, audio and data programming services consists of (i) the approximately 8
to 11 million households that do not have access to cable television (not
"passed by cable"), (ii) the approximately 20 to 21 million households
currently passed by cable television systems with fewer than 40 channels of
programming, (iii) other existing cable subscribers who desire a greater
variety of programming, improved video and audio quality, better customer
service and fewer transmission interruptions, and (iv) the Commercial Market.
The large base of potential customers will enhance the Company's ability to
increase its installed base of Authorized Units.
PRIMESTAR Partners estimates that, based on the number of Authorized Units
installed, its share of current digital satellite television subscribers was
approximately 41.8%, as of September 30, 1996, as compared to an estimated
52.5% share for DirecTv/USSB, an estimated 5.4% share for EchoStar and an
estimated 0.3% share for Alphastar, as of such date.
The Company believes that the following factors will contribute to the
growth of the market for digital satellite services:
Unserved or Underserved by Cable. Approximately 8 to 11 million households
are not passed by cable and approximately 20 to 21 million households are in
areas served by cable systems with fewer than 40 channels. Cable systems with
sufficient channel capacity (generally 54 or more channels) and good quality
cable plant will not require costly upgrades to add bandwidth or incur
significant maintenance costs in order to offer digital programming services.
The Company believes, however, that based on current compression technology,
the number of channels that a cable system would have to remove from its
existing service offerings in order to use them for digital services may, in
the case of cable systems with limited channel capacity, result in the value
of their analog programming offering being degraded and their subscribers
alienated. Accordingly, such systems will be required to incur substantial
costs to upgrade their plant to expand channel capacity before they can
introduce digital services. Due to the substantial capital investment required
for wide scale deployment of fiber-based digital services, several cable
companies have delayed originally-announced deployment schedules. The Company
believes areas served by cable systems which have not been fully upgraded
provide a prime market for digital satellite services.
Commercial Market. The Company believes that digital satellite services are
well suited for hotels, motels, bars, MDUs, schools and other organizations
within the Commercial Market. In addition to the wide variety of
entertainment, sports, news and other general programming, the Company expects
that some commercial organizations will in the future provide a market for
educational, foreign language, and other niche video and audio programming, as
well as data services.
47
<PAGE>
Demand for More Choice in Television Programming, Reliable Service and
Better Quality Picture and Sound. Prior to the growth of cable television
services, television viewers were offered a relatively limited number of
channels. As the number of channels increased, consumer demand for more
programming choices also increased. As a result, the multichannel video market
has experienced significant growth, both in terms of the number of content
producers creating programming and the number of channels available to
viewers. The Company expects this trend will continue and that consumers will
desire even more programming choices than are available through cable. The
Company believes consumers are also demanding more reliable service and
improved picture quality compared to what has historically been offered by
over-the-air VHF and UHF broadcasters and by cable.
STRATEGY
The Company's primary objectives are to maintain its position in the market
as one of the premier providers of satellite delivered entertainment
programming and to become one of the major providers of informational services
to the home and business. It is expected that the Company's strategy will be
achieved as follows:
High Quality Programming. The Company offers consumers the PRIMESTAR(R)
service, which consists of a wide variety of high quality programming,
delivered digitally for laser-disc quality image and compact-disc quality
sound, for a competitive price. The Company believes that the image and sound
quality of the PRIMESTAR(R) service is superior to that provided by most
existing cable systems and wireless cable providers, which transmit analog
signals to their subscribers, and is comparable to that of other digital
satellite television providers, including those using compression methods
based on the MPEG-2 digital compression architecture. The Company further
believes that its combination of price and services provides consumers with
greater value than the respective price and service offerings of other current
digital satellite service providers. In addition, when GE-2 (or its
replacement, GE-3) is successfully launched and begins commercial operation,
PRIMESTAR(R) will increase its channel offerings from 94 video and audio
channels to over 140 channel offerings, while reducing its dish size from 36
inches to approximately 29 inches for subscribers in the majority of the U.S.
See "--PRIMESTAR By TCI--The PRIMESTAR(R) Service."
PRIMESTAR Partners currently broadcasts from K-1, a medium power satellite
located at 85(degrees) W.L. that was launched in January 1986 and is nearing
the end of its useful operational life. K-1 is ultimately expected to be
replaced by GE-2, a medium power satellite that is currently scheduled to be
launched on January 31, 1997 and to be operational within 60 days after
launch. In November 1996, pending the availability of GE-2, K-1 will be
replaced by K-2, another medium power satellite, which is currently located at
81(degrees) W.L. and will be moved to 85(degrees) W.L. K-2 is expected to
begin inclined orbit operations in January 1997, however, and if a replacement
satellite is unavailable, PRIMESTAR(R) subscribers could begin to experience
unacceptable outage levels in the month of June 1997. Thus, a delay in the
availability of GE-2 could result in a material adverse effect on PRIMESTAR
Partners and the Company. If GE-2 suffers a launch failure, another
communications satellite, GE-3, which is currently expected to be available
for launch in the summer of 1997, will be launched to replace GE-2. See "Risk
Factors--Risks of Failure or Delay in Launch of GE-2--Risks of Satellite
Defect, Loss or Reduced Performance" and "Risk Factors--Risks of Failure or
Delay in Launch of GE-2--Risk of Inclined Orbit Operations."
Continued Subscriber Growth. The Company continues to grow its substantial
customer base through its multiple sales and distribution channels, which
include master sales agents and their sub-agents, direct sales
representatives, telemarketing, cable system operators and consumer retail
outlets. The Company recently began to distribute its services through Radio
Shack, one of the nation's largest consumer electronics retailers. In February
1996, PRIMESTAR Partners entered into a national agreement with Radio Shack
under which PRIMESTAR(R) is expected to be sold through more than 6,500 Radio
Shack stores nationwide. As of October 1996, PRIMESTAR(R) is available for
sale in approximately 2,200 Radio Shack stores located in the Company's
authorized distribution territories, and the Company estimates that when the
arrangement is fully implemented, PRIMESTAR(R) will be available for sale in
over 2,500 such stores. In addition, the Company supports its multiple
distribution channels with a wide variety of advertising, marketing and
promotional activities. See "--PRIMESTAR By TCI--Distribution" and "--
PRIMESTAR By TCI--Marketing."
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Differentiating the Company's Offerings Through Superior Customer
Service. The Company believes that providing outstanding service, convenience
and value is essential in developing long term customer relationships. The
Company offers consumers a "one-stop shopping" service which includes
programming, installation, maintenance, reliable customer service and
satellite reception equipment. The Company maintains its own National Call
Center, providing customers with round-the-clock telephone support for sales,
installation, authorization and billing, as well as to schedule repair and
customer service calls, 365 days per year. See "--PRIMESTAR By TCI--
Distribution."
Providing Consumers Attractive Alternatives to Obtain Equipment. The
Company's equipment rental program, which includes free maintenance and
repair, provides significant benefits to customers, who are not required to
buy satellite equipment in order to receive the PRIMESTAR(R) service. Because
PRIMESTAR By TCI is marketed as a service, with programming, equipment rental,
maintenance and 24-hour customer service included in the monthly charge, the
up-front costs to new subscribers of PRIMESTAR By TCI are generally lower than
the up-front costs to new subscribers of the Company's competitors, who must
typically purchase and install HSDs, satellite receivers and related
equipment. Moreover, since the Company generally owns, services and installs
all customer premises equipment for its rental customers, the Company protects
its subscribers from the inconvenience of equipment failure, maintenance
concerns, obsolete technology, self-installation and expired warranties. In
addition, the Company recently began offering consumers several options for
purchasing, rather than renting, the necessary equipment, and intends to
implement a consumer financing program in late 1996 through an independent
financial institution. See "--PRIMESTAR By TCI--Equipment and Installation."
Expanding Commercial Opportunities For Digital Satellite Services. The
Company believes that the Commercial Market offers a substantial opportunity
for growth and is therefore of strategic importance. With an enhanced channel
capacity in its audio and video entertainment programming, subject to the
successful launch and operation of GE-2 (or its replacement, GE-3), the
Company anticipates having the ability to successfully penetrate the
Commercial Market. The Company also intends to pursue opportunities to provide
private network service to businesses, and to participate in the growing
market for distance learning. In that connection, the Company is exploring
opportunities to work together with At Home Corporation, a joint venture among
TCI, Kleiner Perkins Caufield & Byers, Comcast and Cox, to deliver Internet
content to personal computers, and ETC w/tci, Inc., a majority-owned
subsidiary of TCI, formed to develop and distribute content and technology
applications for education, training and communications, as well as other
Internet and educational content providers.
Strategic Marketing Alliances. The Company intends to broaden its product
and service offerings to further complement its existing video services by
forming alliances with strategic partners, such as its existing non-exclusive
relationships with Bose and Apple. See "--PRIMESTAR By TCI--Marketing." The
Company believes that such alliances can be important not only to expand the
market awareness of the Company's name and service offerings, but also to
increase the Company's potential market by expanding the scope of the use of
its product and services.
Focusing on Customers Currently Underserved by Multichannel Programming. The
Company seeks to maximize penetration in the "underserved" marketplace,
defined by the Company as those areas not passed by cable, or served by cable
systems with fewer than 40 channels. To date, the Company's primary market
focus has been the rural market, which is underserved for variety, choice and
convenience in audio and video entertainment programming. With the successful
launch of GE-2 (or its replacement, GE-3), the Company also intends to pursue
subscriber growth in the more urban and suburban markets within its
territories.
High Power Opportunities. The Company continues to assess strategies for
delivering high power digital satellite signals to the consumer's home. The
Company's ultimate strategy could include one or a combination of the
following options: (i) implementing a high power DBS system at 82(degrees)
W.L. pursuant to the proposed Telesat Transaction, (ii) implementing a high
power DBS system at 119(degrees) W.L. under its Construction Permit, either as
a limited service complementary to off-the-air television, basic cable and
other programming services,
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or, subject to future advances in digital channel compression, as a full-
service, stand-alone offering, and (iii) securing additional spectrum capacity
through any new opportunities that may arise. These strategic options may
provide the Company the ability to complement or effectively upgrade its
current service. The Company is currently evaluating the viability and
attractiveness of each of the foregoing options from a regulatory, economic
and technological perspective.
PRIMESTAR BY TCI
The PRIMESTAR(R) Service. PRIMESTAR Partners was formed as a limited
partnership in 1990 by subsidiaries of TCI, several other cable operators and
G.E. Initially, PRIMESTAR Partners' product was an analog service limited to
seven broadcast television superstations, TV Japan and three pay-per-view
stations. In 1994, PRIMESTAR Partners was among the first satellite television
providers to use digital compression technology for superior delivery of
picture and sound. PRIMESTAR Partners currently provides 94 channels of
entertainment programming throughout the continental U.S., via medium power
satellite, to HSDs approximately 36 inches in diameter. During the first
quarter of 1997, subject to the successful launch and operation of GE-2,
PRIMESTAR Partners will have the capacity to increase its offerings to about
140 channels of programming while reducing its dish size to approximately 29
inches for subscribers in the majority of the U.S. These smaller dishes can be
attached more easily to a subscriber's wall or roof.
PRIMESTAR(R) includes a variety of advertiser-supported networks (sometimes
referred to as "basic cable" channels), a broad selection of movie services,
national and regional sports packages and other premium services, and
multiplexed pay-per-view programming. See "--Programming." PRIMESTAR Partners
secures its rights to broadcast such programming by entering into non-
exclusive affiliation agreements with programming vendors. In addition to
video services, PRIMESTAR(R) includes digital audio and data services,
including Ingenius, which provides access to news, business news, stock
quotes, sports, weather and entertainment information to subscribers through
their personal computers.
PRIMESTAR Partners currently broadcasts from 14 transponders on K-1, a
medium power Ku-band satellite owned and operated by GE Americom. Digital
satellite television service requires that subscribers install HSDs for a
clear line of sight to the transmitting satellite. K-1 is located at 85 W.L.
in the FSS arc and provides coverage to the entire continental U.S. with
favorable "look" angles, meaning that the satellite is viewable from the
entire continental U.S. at angle elevations high enough to facilitate
installation of HSDs in most areas. Additionally, K-1's orbital location over
the East coast of the U.S. is considered favorable because the signal travels
a shorter path through the relatively moist air of the Eastern sea board,
minimizing potential interference from bad weather. The overall PRIMESTAR
system is designed for high availability and operates consistently without any
significant interference approximately 99.8% of the time. Pursuant to its
agreement with GE Americom, up to 10 of PRIMESTAR Partners' transponders are
subject to preemption if transponders on GE Americom's second FSS satellite,
K-2, cease to be operational. However, the Company does not believe that
PRIMESTAR Partners' use of preemptible transponders is likely to interfere in
any material respect with the operation of the PRIMESTAR(R) service.
PRIMESTAR Partners currently uses proprietary authorization, encryption and
digital compression technology developed by an affiliate of GI. The Company
believes that the compression technology used by PRIMESTAR Partners, which is
known as DigiCipher-1(R), produces picture and sound quality comparable to
that of other digital satellite television providers, including those using
compression methods based on the MPEG-2 digital compression architecture.
Uplinking, encoding and compression services are provided by WTCI, an
affiliate of TCI, under a Master Digital Transmission Agreement between WTCI
and the Partnership. Although the DigiCipher-1(R) satellite receiver used by
PRIMESTAR(R) customers is not currently compatible with MPEG-2 compression
systems, it can be upgraded to be compatible through equipment provided by GI,
the cost of which equipment is projected to range from $150 to $200 at
commercial volumes.
PRIMESTAR Partners has entered into the GE-2 Agreement, pursuant to which GE
Americom has agreed to provide the Partnership with service on 24 transponders
on GE-2, subject to the successful launch of that satellite. GE-2, which is
currently scheduled to be launched on January 31, 1997 and to be operational
within 60
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days thereafter, would replace K-1, which is nearing the end of its useful
life. See "Risk Factors--Risks of Failure or Delay in Launch of GE-2--Risks of
Satellite Defect, Loss or Reduced Performance" and "Risk Factors--Risks of
Failure or Delay in Launch of GE-2--Risk of Inclined Orbit Operations." The
additional transponders on GE-2 would enable PRIMESTAR Partners to offer about
140 channels of programming. In addition, the use of higher power transponders
on GE-2, as compared to K-1, is expected to enable PRIMESTAR(R) subscribers to
utilize 29 inch HSDs in the majority of the U.S., rather than the 36-inch
dishes currently required, without a meaningful increase in signal
interference.
The GE-2 Agreement is for an initial term of four years from the date on
which service is made available to the Partnership on GE-2 following GE-2's
becoming commercially operational. The term is extendible for the remainder of
the useful life of GE-2 (the "End-of-Life Option") at the option of PRIMESTAR
Partners exercised prior to the later of December 31, 1996 and 45 days after
written notice from GE Americom to the Partnership that delivery of GE-2 has
occurred under GE Americom's construction contract. Nonpreemptible service
will be provided to the Partnership on 18 of the transponders on GE-2 and
preemptible service will be provided on six transponders. Preemptible
transponders will be reassigned to restore service to protected customers and
services should such protected customers or services experience satellite
failure. The Company does not believe, however, that, during the early stages
of GE-2's operational life, the use of preemptible transponders by PRIMESTAR
Partners is likely to interfere in any material respect with the operation of
the PRIMESTAR(R) service. Under the GE-2 Agreement, if PRIMESTAR Partners
exercises the End-of-Life Option, GE Americom would be required to make
available another communications satellite, GE-3, to serve as an in-orbit
spare for GE-2 (referred to as "orbital location protected service"). After
orbital location protected service is being provided and effective upon the
successful launch of GE-4 (as described below), the Partnership's transponders
would become nonpreemptible. If GE-2 suffers a launch failure, GE-3 (which is
currently expected to be available for launch in the summer of 1997) will be
launched to replace GE-2. In that event, GE-3 will not be available to serve
as an in-orbit spare for GE-2; however, if PRIMESTAR Partners exercises the
End-of-Life Option, GE Americom would make available another communications
satellite, GE-4, to replace GE-3, sometime in the second half of 1998. If a
launch failure or other defect or damage affecting GE-2 and GE-3 were to
prevent or materially delay the commercial operation of both such satellites,
the business of both PRIMESTAR Partners and the Company could be materially
and adversely affected.
If, after exercise of the End-of-Life Option, PRIMESTAR Partners intends to
use more than six of its transponders for uses other than providing
PRIMESTAR(R) service, GE Americom may reduce service from orbital location
protected service to nonpreemptible or preemptible service, as the case may
be. However, the Partnership shall be entitled to restoration on GE-3 of the
transponders on GE-2 which suffer a transponder failure, which restored
transponders shall continue to be nonpreemptible or preemptible, as the case
may be, until such time as GE-4 becomes operational, at which time they shall
become nonpreemptible transponders. If PRIMESTAR Partners exercises the End-
of-Life Option, PRIMESTAR Partners will have a further right to negotiate to
obtain capacity on any successor satellite to GE-2 launched by GE Americom at
85(degrees) W.L.
As contemplated by the PRIMESTAR Partnership Agreement, the Partnership does
not distribute its programming directly, but utilizes distributors to market
the PRIMESTAR(R) service and contract with subscribers. Currently, affiliates
of each of the Partnership's partners other than GEAS, including the Company,
are authorized Distributors of PRIMESTAR(R). However, the PRIMESTAR
Partnership Agreement does not require that Distributors be affiliated with
the Partnership's partners. None of the Distributors currently has a formal
written distribution agreement with PRIMESTAR Partners, although PRIMESTAR
Partners and the Distributors have attempted to negotiate such an agreement
from time to time since 1990. All of the Partnership's distribution
arrangements are currently non-exclusive. The PRIMESTAR Partnership Agreement
also contemplates the possibility that the Partnership may establish a
separate national marketing company to distribute PRIMESTAR(R); however, the
Partnership has not taken any action to create such a national marketing
company, and the creation of such a national marketing company would require a
supermajority vote of the Partners Committee.
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The Company and other Distributors set their own retail pricing and are
responsible in their respective territories for installation, maintenance and
retrieval of customer premises equipment, authorization of subscribers, and
billing and collection of monthly and other fees, and bear all risks of loss
relating thereto. The Partnership negotiates and enters into agreements with
programmers, arranges for satellite capacity through its agreements with GE
Americom and is responsible, through its Master Digital Transmission Agreement
with WTCI, for the uplinking and compression of programming signals. In
addition, the Partnership provides marketing and administrative support,
including national advertising and a national toll-free number, "1-800-
PRIMESTAR," that automatically transfers potential customers to one of the
Distributors, based on the potential customers' zip codes. Potential customers
in the Company's service areas who call the "1-800" number and key in their
zip codes are transferred automatically to the Company's National Call Center.
In return for such services, the Partnership collects from the Distributors a
monthly programming fee based on the number of Authorized Units receiving such
programming plus a separate monthly authorization fee based on each
Distributor's total number of Authorized Units.
The Company markets and distributes the Partnership's equipment and services
to households and businesses in its assigned territories under the name
PRIMESTAR By TCI. The Company's territories as a PRIMESTAR(R) Distributor
comprise communities in the vicinity of TCI's cable television franchise areas
and other areas assigned by the management of PRIMESTAR Partners, in each case
on a non-exclusive basis. The Company's territories cover approximately 45% of
the geographic area of the U.S. and 19,163 zip codes, as of June 1996. The
Company estimates that approximately 38% of the country's 96.3 million
television households reside in the Company's territories.
Programming. The Company currently offers consumers three primary
programming packages, which provide a wide variety of programming selections, as
detailed in the chart below. The PrimeFamily(SM) package offers 74 channels of
programming with 14 commercial-free premium movie channels in addition to a
selection of other channels. The PrimeEntertainment(SM) package offers 64
channels of programming and gives the customer four commercial-free movie
channels as well as a combination of a number of popular channels. Lastly, the
PrimeValue(SM) package offers customers 52 channels of expanded programming.
Each of the packages includes a free monthly programming guide. As of June 30,
1996, the monthly prices for the PrimeFamily(SM) package, the
PrimeEntertainment(SM) package and the PrimeValue(SM) package were $44.99,
$29.99 and $22.99, respectively. Most of the Company's customers rent their
equipment and pay an additional $10 monthly charge for equipment rental, which
includes free maintenance and 24-hour customer service.
The Company also offers 11 channels of pay-per-view movies and events and
niche services on an "a la carte" basis such as ABC, NBC, CBS, FOX, PBS, The
Golf Channel, TV Japan and Ingenius.
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The Company's three primary programming packages consist of the following:
PRIMEVALUE(SM) PRIMEENTERTAINMENT(SM) PRIMEFAMILY(SM)PACKAGE 74
PACKAGE 52 CHANNELS PACKAGE 64 CHANNELS
CHANNELS
- --------------------------------------------------------------------------------
A & E All PrimeEntertainment(SM)
Channels
All PrimeValue(SM)Channels
CSPAN 1
Cartoon Plus: Plus:
CNBC
CNN Classic Sports Cinemax--Multichannel (2)
Discovery CMT Cinemax Selecciones (2)
Disney (2) CNN International/CNN-FN HBO--Multichannel (3)
ESPN E! HBO en Espanol (3)
Faith & Values Encore
Family Channel Encore Multiplex (2)
Headline News ESPN 2
Learning Channel Sci-Fi
Lifetime STARZ!
MTV TCM
Nickelodeon The Weather Channel
Prevue
QVC
Regional Sports Networks (15)
TBS
TNN
TNT
Univision
USA
Digital Audio Channels (14)
As of June 30, 1996, the Company had an installed base of approximately
659,000 Authorized Units. Subscriptions to the Company's (i) premier
programming package, the PrimeFamily(SM) package, (ii) mid-level
PrimeEntertainment(SM) package, and (iii) basic PrimeValue(SM) package comprised
approximately 39%, 26% and 35%, respectively of the Company's Authorized Units
at June 30, 1996. Exclusive of installation revenue, the Company's average
monthly revenue per Authorized Unit was $44 and $41 for the six months ended
June 30, 1996 and the year ended December 31, 1995, respectively. At June 30,
1996, the Company's customers represented approximately 47% of PRIMESTAR
Partners' estimated 1.4 million installed Authorized Units.
The Company contracts with and bills its residential and commercial
subscribers directly for PRIMESTAR(R) services. Residential subscribers may
terminate their service at any time upon notice to the Company while commercial
subscribers must provide 90 days' written notice to the Company prior to the
expiration of their contractual term to terminate their service. A commercial
customer can terminate the contract prior to the expiration of the contractual
term by paying 75% of the remaining amount due.
In an effort to minimize the Company's churn rate, the Company has
implemented new policies, including a more stringent automatic disconnect
policy for subscriber non-payment and a tightened credit check policy for new
subscribers. The Company also believes that its churn rate is affected by
subscribers' ability to rent, rather than purchase, the PRIMESTAR(R) satellite
reception equipment, which both attracts subscribers unable or unwilling to
make the financial commitment required to purchase such equipment and reduces a
subscriber's cost of dropping the service.
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Satellite reception equipment reclaimed from terminating subscribers is
tested, refurbished as necessary and placed back into service. Used equipment
in good working order is used, among other places, in master antenna and other
commercial installations where such equipment is not visible to the end user.
Distribution. The Company distributes PRIMESTAR(R) services through multiple
distribution channels. The Company's Master Agent Program, direct sales force,
a state-of-the-art National Call Center for orders, information and customer
service and a recently implemented agreement with Radio Shack form a wide-
reaching distribution network. The Company has engaged four master sales
agents, Metron Digital Services, Inc., CVS Systems, Inc., Resource
Electronics, Inc. and Recreation Sports and Imports, Inc. (collectively, the
"Master Agents"), each of which has extensive experience distributing C-band
direct-to-home satellite equipment. Master Agents generally do not sell
directly to customers, but recruit, train and maintain a network of sub-agents
comprised generally of full service independent satellite retailers in the
Company's target markets, including rural and other areas that are not served
or are underserved by cable television. The sub-agents sell PRIMESTAR(R)
services on behalf of the Company and install, service and maintain customer
premises equipment for the Company's subscribers. Authorization of new
customers is provided by the National Call Center. At June 30, 1996, the
Company's Master Agents had over 1,400 active sub-agents and in the first six
months of 1996 the Master Agent Program accounted for approximately 50% of the
Company's new business.
The Company believes that the Master Agents, who are responsible for the
acts of their sub-agents, are currently able to manage the diverse network of
satellite retailers more effectively than the Company could do so directly.
Master Agents are responsible for maintaining their sub-agents' inventories of
HSDs and other customer premises equipment, which are provided by the Company
on consignment. The Company pays the Master Agents commissions on equipment
leased or sold by their sub-agents, as well as an installation reimbursement
to cover the cost of each new installation and a 10% commission on monthly
programming revenue received from subscribers enrolled through the Master
Agent Program, for a contractually determined period of time (generally five
years). Master Agents are responsible for compensating their sub-agents.
The Company's direct sales force solicits potential subscribers by
telephone, makes door-to-door sales calls, sets up booths at special events
and otherwise markets the Company's products and services to customers in
target markets in its authorized distribution areas. At June 30, 1996, the
direct sales force consisted of approximately 820 employees throughout the
Company's service areas operating out of the Company's five regional offices
and several field offices. To date, the main focus of the direct sales force
has been rural and semi-rural communities. Direct sales employees are paid
pursuant to a tiered compensation plan with varying commission arrangements
based on productivity. New subscriptions obtained by the direct sales force
are referred to the Company's National Call Center for authorization, which in
turn dispatches the new orders to the nearest TCI cable system for
installation.
In order to support its direct sales force, the Company obtains
installation, maintenance, retrieval, inventory management and other customer
fulfillment services from TCIC for Company customers enrolled by its direct
sales force or National Call Center. Pursuant to the Fulfillment Agreement,
TCIC will continue to provide fulfillment services to the Company following
the Distribution with respect to customers of the PRIMESTAR(R) medium power
service. The Fulfillment Agreement, among other things, sets forth the
responsibilities of TCIC with respect to fulfillment services, including
performance standards and penalties for nonperformance, and provides scheduled
rates to be charged to the Company for the various customer fulfillment
services to be provided by TCIC. The Company retains sole control under the
Fulfillment Agreement to establish the retail prices and other terms and
conditions on which installation and other services will be provided to the
Company's customers.
The National Call Center, which, as of June 30, 1996, housed more than 450
employees, takes subscription orders and provides both sales support and
customer service. The National Call Center offers customers round-the-clock
telephone support for sales, installation, authorization and billing, as well
as for repair and customer service, 365 days per year. During the six months
ended June 1996, the National Call Center handled over 3.3 million customer
service calls and over 400,000 sales calls. In addition, the Company engages
teleservices
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vendors to assist the Company in providing these services. The Company trains
the employees of these teleservices vendors and works closely with them to
ensure that its existing and potential subscribers receive quality customer
service.
In addition to the Master Agent Program, direct sales force and National
Call Center, the Company has recently begun distributing its services through
certain national consumer electronics retailers. In February 1996, PRIMESTAR
Partners entered into a national agreement with Radio Shack, one of the
nation's largest consumer electronics retailers, under which PRIMESTAR(R) is
expected to be available through more than 6,500 Radio Shack stores
nationwide. Under this agreement, Radio Shack is compensated based on the
number of installations generated. As of October 1996, PRIMESTAR(R) is
available for sale in approximately 2,200 Radio Shack stores located in the
Company's authorized distribution territories, and the Company estimates that
when the arrangement is fully implemented, PRIMESTAR(R) will be available for
sale in over 2,500 such stores. Retail points of sale will be in the Company's
authorized distribution territories. The Company's distribution network is
further supported by approximately 900 local market retailers, such as
hardware stores and convenience stores, which promote the Company's services
and further assist the Company in its distribution efforts.
The Company believes that its use of a number of different distribution
channels has been an important factor in the success of its sales efforts over
the past 18 months and will continue to fuel subscriber growth. During 1995,
the Company expanded its points of sale over seven-fold, from 325 to
approximately 2,400. Furthermore, the Company's sub-agents ranked highest in
customer satisfaction in a study conducted by the SBCA in August 1995. The
Company's sub-agents scored highest for post-sale customer support and
salesperson knowledge of the industry and technology, as well as programming.
Moreover, the SBCA research showed that the Company's service strategy ranked
first as the customer's choice for a "better buying experience." The Company
intends to continue to target multiple distribution channels and to expand on
its existing satellite retailer distribution network and presence with
consumer electronics outlets.
Equipment and Installation. Unlike other digital satellite television
services, PRIMESTAR(R) does not require consumers to purchase or finance the
equipment needed to receive its programming. The Company provides the HSD,
satellite receiver and remote control to subscribers for a monthly rental fee
starting from about $10 per month, which includes ongoing maintenance and
service at no additional charge. (The monthly equipment rental fee is normally
included in a service package that includes various levels of basic and
premium programming.) Satellite receivers are manufactured by GI, and packaged
by GI with remote controls, and HSDs are manufactured by multiple vendors,
under agreements with PRIMESTAR Partners. Pursuant to such agreements, each
Distributor orders and purchases its inventory of customer premises equipment
directly from the vendor, and is responsible for certain minimum purchases
based on forecasts provided to the vendor through PRIMESTAR Partners.
Approximately 99% of the Company's subscribers currently elect to rent their
equipment from the Company, and the Company believes that the ability to obtain
PRIMESTAR(R) without a large initial cash outlay is a significant factor in the
Company's early acceptance by consumers. However, for those subscribers who
would prefer to own their equipment, the Company recently implemented two
alternative purchase options: (i) subscribers who agree to purchase the
PrimeEntertainment(SM) or PrimeFamily(SM) package for one year and who pay in
full for such package in advance are given the option to purchase a satellite
receiver for $199 plus an installation charge of $199 and (ii) subscribers who
wish to purchase two satellite receivers are given the option to purchase the
first receiver for $199 and a second used receiver for $325, with the
installation charge of the first receiver set at $199 and the installation price
of the second receiver reduced to $75, and such subscribers are not required to
commit to a one-year subscription and may purchase either the PrimeValue(SM),
PrimeEntertainment(SM) or PrimeFamily(SM) package. In order to make the purchase
option more attractive and provide subscribers with additional payment choices,
the Company will implement a consumer financing program in late 1996 through an
independent financial institution. The consumer financing program will be
available to customers who elect either of the two purchase options, but all
customers participating in such program would be required to purchase their
programming package in advance. The Company believes that an
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attractive financing option may provide customers with a greater incentive to
purchase the equipment, increasing revenues and decreasing churn. PRIMESTAR(R)
equipment incorporates proprietary technology and must be purchased from the
Company or another authorized Distributor or retailer. For those customers who
elect one of the purchase options described above, the Company currently
provides a free one-year in-home service warranty for the purchased equipment.
In addition to monthly fees for programming and the purchase or lease of
equipment, the Company generally charges new subscribers an installation fee,
which is currently $199. In order to insure that HSDs are properly pointed and
aligned to receive the PRIMESTAR(R) signal, the Company strongly recommends
professional installation. The Company also offers qualified subscribers an
opportunity to enter into subscription contracts that allow for the option of
paying their installation fee over time. Further, from time to time, the
Company offers special installation prices on a promotional basis. Certain of
the Company's competitors offer consumers the option of self-installation of
the HSD and other equipment for their digital satellite systems, with an
installation kit that retails for approximately $70.
Marketing. The Company engages in extensive local and regional marketing,
advertising and promotional activities to increase consumer awareness of
PRIMESTAR(R), to promote the sale and lease of PRIMESTAR(R) equipment and to
generate subscriptions to PRIMESTAR(R). To complement the national marketing
support received from PRIMESTAR Partners, the Company operates a central
advertising strategy that also supports regional marketing efforts. The
Company's advertising strategy focuses on five important selling points for
potential subscribers: (i) program variety, (ii) good value, (iii) digital
quality picture and sound, (iv) no equipment to buy, and (v) on-going
equipment maintenance and service at no extra charge. The Company also
provides its network of sub-agents and direct sales force with marketing
support ranging from cooperative advertising funds to customized advertising
campaigns. The Company intends to continue these efforts in the future.
The Company's current regional and local advertising strategy includes
television, print and radio advertisements, direct mail campaigns, handouts of
brochures and flyers and participation in local events, including the display
of posters, banners and pop-up displays. The Company has engaged a media
agency to provide media counsel and services to aid the Company in planning,
placing and measuring results in regional and local advertising and media
programs. The Company has also engaged an advertising agency to develop all
strategic and creative efforts in advertising and a marketing fulfillment
agency to provide direct mail, collateral materials and other marketing
services.
The Company, from time to time, promotes subscriptions to its programming
service by offering discounts or free services for a limited period of time.
For example, the Company has offered a discount for annual subscriptions,
whereby customers, by paying annually, have been entitled to get one month for
free. In addition, the Company has provided coupons to new customers which
offer programming discounts, providing customers with the opportunity to try
many of the Company's premium services. Finally, the Company has also provided
free pay-per-view movies to new subscribers for a limited period of time.
The Company engages independent retailers as display representatives who
display promotional materials about the Company. The Company uses such display
representatives to promote its service and to attain customer referrals. The
Company pays the display representative a one time referral fee for each
eligible subscriber who installs the service within sixty days of the
referral.
The Company has initiated a joint marketing alliance with Bose under the co-
brand name "PRIMESTAR/Bose Home Theater systems." Pursuant to this alliance,
the Company and Bose will offer a home theater system which includes the Bose
Companion satellite surround system, a complete surround sound system designed
specifically for use with home satellite systems.
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The Company also engages in two joint marketing efforts with TCI. First, the
Company, since March 1996, has been distributing Kid Control(TM), a child-size
remote control unit supplied by TCI. The Kid Control(TM) units are channel
selectors designed solely for children and help parents monitor and control
television viewing. They are pre-programmed with the most popular children's
programming to provide a secure lineup of age-appropriate entertainment.
Second, as a sign of its commitment to education, the Company, along with TCI,
launched the PRIMESTAR Goes To School program which provides schools not wired
for cable with free access to PRIMESTAR(R) equipment and 500 hours of
commercial-free "Cable in the Classroom" programming per month. This
educational package is offered free of charge. The program is designed to
provide educational programming and data services and offer access to training
to inner city, rural and other schools that do not have access to cable and
that are within the Company's territories. From its inception in November 1995
through June 30, 1996, over 1,100 schools have enrolled in the program.
The Company has also entered into a joint marketing agreement with Apple,
pursuant to which the Company is expected to market and resell certain Apple
products with value-added enhancements for education and home uses. The
Company is authorized to provide schools that obtain PRIMESTAR(R) with
discount coupons toward the purchase of Apple computers, and intends to work
with Apple (and potentially other personal computer vendors) to bundle home
computer sales with PRIMESTAR(R).
The Company intends to continue and increase its joint marketing efforts to
bundle products and services to the marketplace. The Company believes such
efforts will assist the Company in maximizing its potential market share.
ResNet Transaction. Effective as of October 21, 1996, the Company acquired
4.99% of the issued and outstanding capital stock of ResNet. ResNet was formed
by LodgeNet in February 1996 to engage in the business of operating as a
"private cable operator" under applicable federal law, providing video on-
demand, basic and premium cable television programming, and other interactive,
multi-media entertainment and information services to subscribers in multiple
dwelling units with facilities that do not use any public right-of-way (the
"ResNet Business"). ResNet agreed to purchase from the Company up to $40
million in satellite-reception equipment, to be used in connection with the
ResNet Business exclusively, over a five-year period (subject to a one-year
extension at the option of ResNet if ResNet has not purchased the full $40
million in equipment during the five-year initial term). The Company also
agreed to make a subordinated convertible term loan to ResNet, the proceeds of
which can be used only to purchase such equipment from the Company. The term
of the loan is five years with an option by ResNet to extend the term for one
additional year. The total principal and accrued and unpaid interest under the
loan is convertible over a four-year period into shares of common stock of
ResNet that will provide the Company with the right to acquire an additional
32% of the issued and outstanding common stock of ResNet. The Company's only
recourse with respect to repayment of the loan is conversion into ResNet stock
or warrants as described below. Under current interpretations of the FCC rules
and regulations related to restrictions on the provision of cable and
satellite master antenna television services in certain areas, the Company
could be prohibited from holding 5% or more of the stock of ResNet and
consequently could not exercise the conversion rights under the convertible
loan agreement. The Company is required to convert the convertible loan at
such time as conversion would not violate such currently applicable regulatory
restrictions. In addition, ResNet granted the Company an option to acquire an
additional 13.01% of the issued and outstanding common stock of ResNet at
appraised fair market value at the time of exercise of the option. The option
is exercisable between December 21, 1999 and the maturity of the convertible
loan. Upon the maturity date of the convertible loan, if the Company has been
prevented from converting the loan or exercising the option in full due to the
previously described regulatory restrictions, ResNet will issue warrants to
the Company to acquire the stock that has not been issued pursuant to
conversion of the loan and the stock that the Company has a right to acquire
by exercise of the option. The exercise price of the warrants to be issued in
respect of the convertible loan will be de minimus, and the exercise price of
the warrants to be issued in respect of the option will be equivalent to the
exercise price under such option. The Company has agreed to customary
standstill provisions with respect to acquisitions of more than 10% of the
outstanding stock of LodgeNet and any additional shares of ResNet.
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The Company also entered into a long-term signal availability agreement with
ResNet, pursuant to which the Company will transport to "private cable
systems" owned and operated by ResNet, the satellite signal used by PRIMESTAR
Partners to transmit its programming services (the "PRIMESTAR Satellite
Signal") or the signal of a substantially comparable service. "Private cable
system" means a satellite master antenna television system that provides
television programming services to residential MDUs through cable plant or
other equipment that is located entirely on private property and does not
constitute a direct-to home distribution system or a franchised cable system.
The Company is acting solely to make the PRIMESTAR Satellite Signal available
to ResNet and is not acting as a distributor of any PRIMESTAR(R) programming
services to ResNet. ResNet must obtain its own rights from the applicable
programming networks to receive the programming services and to distribute
them to ResNet's subscribers. WTCI has the right from PRIMESTAR Partners to
use the PRIMESTAR Satellite Signal for delivery of programming for the benefit
of third parties, including private cable systems (the "simultaneous use
rights"). WTCI has agreed with the Company that private cable systems
designated by the Company, including the ResNet private cable systems, will
receive the transport of the PRIMESTAR Satellite Signal by WTCI in exchange
for the payment by the Company of a fee per subscriber per video program
signal. The agreement between the Company and WTCI is coextensive with the
agreement between WTCI and PRIMESTAR Partners, which expires on March 31,
2001, and there is no assurance that the Company will continue to have the
ability to make the PRIMESTAR Satellite Signal available after that date. In
its agreement with ResNet, the Company has committed to make the PRIMESTAR
Satellite Signal or the signal of a substantially comparable service available
for a term that extends substantially beyond March 31, 2001. If the Company
loses its contractual ability to make the PRIMESTAR Satellite Signal available
and is not able to make the signal of a substantially comparable service
available, the Company is obligated to reimburse ResNet for its costs in
obtaining a digital signal from another source, including the cost of
replacement equipment if the new digital signal is not compatible with
ResNet's equipment. While it is not possible at this time to quantify the
amount that the Company would be obligated to pay to ResNet under the
circumstances described above, the Company believes that the costs could be
significant, particularly if it were to lose its ability to make a signal
available towards the end of its agreement with ResNet.
The Company has also entered into a shorter term signal availability
agreement with one other customer and intends to pursue other signal
availability opportunities as they arise.
Counsel to PRIMESTAR Partners has advised the Company of the Partnership's
position that there are certain preconditions to WTCI's simultaneous use
rights which have not yet been satisfied and that such rights are not
assignable by WTCI to the Company. The Company believes that its transaction
with ResNet and similar transactions are permitted under the agreement between
WTCI and the Partnership. The Company does not believe that any potential
dispute with the Partnership regarding this issue is likely to have a material
adverse effect on the Company.
Use of PRIMESTAR(R) Name and Marks. The Company markets and distributes the
Partnership's equipment and services to households and businesses in its
assigned territories under the name PRIMESTAR By TCI. PRIMESTAR(R) is a
registered service mark of PRIMESTAR Partners. The Company believes that it
has the right to use the PRIMESTAR(R) name and certain related trademarks and
service marks as a Distributor, in substantially the same manner as it has
been using such name and marks, pursuant to its existing understandings with
PRIMESTAR Partners. However, the Company does not have a written license to
use the PRIMESTAR(R) name and marks, and there can be no assurance that the
Company will be entitled to continue to use the PRIMESTAR(R) name and marks in
the future.
HIGH POWER SATELLITES
The Company is pursuing various alternative strategies to participate in the
high power segment of the digital satellite industry. The Company, through
Tempo, holds a Construction Permit issued by the FCC authorizing construction
of a DBS system consisting of two or more satellites delivering DBS service in
11 frequencies at the 119(degrees) W.L. orbital position and 11 frequencies at
the 166(degrees) W.L. orbital position. Tempo is also
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a party to the Satellite Construction Agreement with Loral, pursuant to which
Tempo has agreed to purchase the Company Satellites and has an option to
purchase up to three additional satellites. The Company is currently pursuing
two parallel strategies for deploying the Company Satellites.
Telesat Transaction. In May 1996, subject to both American and Canadian
regulatory approvals, the Company, through Tempo, entered into agreements for
the proposed Telesat Transaction, an arrangement with Telesat to launch one or
both of the Company Satellites into the 82(degrees) W.L. orbital position. The
82(degrees) W.L. orbital position is a high power direct broadcast satellite
slot allocated by international agreement to Canada. The Telesat Transaction,
if consummated, provides that (i) the Company will sell the Company Satellites
to Telesat in accordance with the Satellite Purchase Agreement dated as of May
6, 1996 (the "Satellite Purchase Agreement") between Tempo and Telesat and
(ii) Telesat will simultaneously resell 27 of the 32 transponders on the
Company Satellites to the Company, in accordance with the Operating Services
Agreement between Telesat and TCITV, which agreement will be assigned by TCITV
to a subsidiary of the Company prior to the Distribution. It is expected that
WTCI would provide uplinking and compression services in connection with any
DBS service to be operated using the transponders to be purchased from
Telesat.
The purchase price (the "Satellite Purchase Price") payable by Telesat for
each Company Satellite if the Telesat Transaction is consummated is an amount
equal to the total cost of constructing, launching and placing into orbit such
Company Satellite, including capitalized interest and other financing costs
relating thereto. At the closing of the sale of each Company Satellite, in
accordance with the Operating Services Agreement, a subsidiary of the Company,
by assignment from TCITV, will purchase 27 of the 32 transponders on such
Company Satellite, for an initial payment equal to one-half of 27/32nds of the
Satellite Purchase Price for such Company Satellite, which payment will be
offset against the Satellite Purchase Price to be paid at that closing by
Telesat (and the balance of the Satellite Purchase Price remitted by the
Company to the Partnership to repay advances under the Tempo Letter Agreements
described below). Thereafter, the Company will pay Telesat a quarterly
operating fee for use of the transponders, including charges for in-orbit
insurance and tracking, telemetry and control of the Company Satellites. The
aggregate operating fee per quarter is fixed for the first 48 quarters,
subject to adjustment based on the actual Satellite Purchase Price for the
Company Satellites. If the Company continues to use the transponders after 48
quarterly payments have been made, the Company will make quarterly payments to
Telesat at a rate equal to about one-fourth of the previous quarterly
payments.
The proposed Telesat Transaction is subject to the approval of U.S. and
Canadian regulatory authorities. No assurance can be given that such
regulatory approval will be obtained or will be obtained on terms satisfactory
to the Company. On March 26, 1996, WTCI filed an application with the FCC for
authorization to construct and operate an earth station to uplink video
programming to the Company Satellites that would be launched into 82(degrees)
W.L. pursuant to the Telesat Transaction. On July 1, 1996, four cabinet-level
departments of the executive branch of the U.S. government filed the Executive
Branch Letter with the FCC recommending that the FCC treat the application as
premature and raising concerns regarding the application relating to
international agreement obligations, Canadian content restrictions, Canadian
licensing restrictions and domestic competition policy. On July 15, 1996, the
FCC dismissed WTCI's application, without prejudice, on the ground that the
application was premature because Canada has not yet issued licenses to
Telesat, which will own and operate the satellite containing the Company's
transponders to which WTCI will uplink. The FCC's order expressly did not
address any of the substantive issues raised by WTCI's application or by the
various petitions to deny WTCI's application that had been received from the
Company's competitors. The FCC indicated, however, that if WTCI refiled its
application, it would take into account concerns raised by the Executive
Branch Letter with respect to the application.
On August 14, 1996, WTCI filed a petition seeking reconsideration on the
ground that, although a formal license has not been issued, Industry Canada
has in fact issued all the pre-launch authority it customarily grants to
satellite applicants and that Telesat has received from Industry Canada its
standard support in principle for its proposal. In addition, WTCI noted that
none of the concerns raised by the Executive Branch Letter should impede grant
of WTCI's application. There can be no assurance, however, that the FCC will
respond favorably
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to the petition. Furthermore, although the Company believes that WTCI's
proposal is in the public interest and fully consistent with applicable FCC
rules and policies (as well as applicable treaties and international
agreements), there can be no assurance that the FCC will not deny such
application on substantive grounds when it reconsiders the matter, and the
Company cannot predict whether WTCI will ultimately receive the necessary
authorizations to operate the planned uplink station. See "Risk Factors--Risks
of Adverse Government Regulations and Adjudications." If Telesat notifies the
Company that Telesat has obtained all government approvals and authorizations
required to be obtained by Telesat in connection with the Telesat Transaction,
prior to the Company obtaining its required government approvals and
authorizations, Telesat would have the right to terminate the Telesat
Transaction, under its agreement with the Company.
Construction of one of the Company Satellites ("Satellite No. 1") has been
completed and has been outfitted with an antenna for the 82(degrees) W.L.
orbital location. Construction of the other Company Satellite ("Satellite No.
2") has been completed except for the installation of an antenna. Loral has
advised the Company that the Company must notify Loral of the required antenna
configuration of Satellite No. 2 on or about November 1, 1996, for Satellite
No. 2 to be ready for launch by the February Launch Date (defined below).
Pursuant to the Satellite Construction Agreement with Loral, Tempo has
arranged for two possible launches, one on a Proton rocket currently scheduled
for launch on December 19, 1996 (the "December Launch Date") by ILS on behalf
of LKE and the other on an Atlas rocket scheduled for launch by ILS on behalf
of Lockheed-Martin on February 27, 1997 (the "February Launch Date"). In order
to meet the December Launch Date, one of the Company Satellites would have to
be shipped from Loral's facility on or about November 13, 1996. The Company is
currently in discussions with Loral and other parties with respect to the
possibility of obtaining an additional launch window in 1997 to replace the
December Launch Date. However, there can be no assurance that such a launch
window can be arranged at this time or will be available on terms acceptable
to the Company. If the Company is unable to utilize the December Launch Date
or to obtain a replacement launch window in 1997, the Company would not be
able to deploy one of the Company Satellites before 1998.
If the Company receives all necessary regulatory approvals for the Telesat
Transaction by November 1, 1996, the Company currently intends to launch
Satellite No. 1 into the 82(degrees) W.L. orbital location on the December
Launch Date. In addition, Tempo will instruct Loral to install an antenna on
Satellite No. 2 that is suitable for operation at the 91(degrees) W.L. orbital
location. In such event, Satellite No. 2 will be shipped to Cape Canaveral in
time for the February Launch Date and is expected to be deployed temporarily
into the 91(degrees) W.L. orbital position before being moved to 82(degrees)
W.L.
If the Company receives all necessary regulatory approvals for the Telesat
Transaction after November 1, 1996, but on or before November 13, 1996, then
subject to Telesat's agreeing to amend its agreements with the Company to
eliminate the references to a satellite being deployed at 91(degrees) W.L.,
the Company currently intends to launch Satellite No. 1 into the 82(degrees)
W.L. orbital location on the December Launch Date. In addition, it is expected
that the Company will instruct Loral to install an antenna on Satellite No. 2
that is suitable for operation at the 119(degrees) W.L. orbital location,
Satellite No. 2 will be shipped to Cape Canaveral in time for the February
Launch Date and will be launched into the 119(degrees) W.L. orbital location.
If all necessary regulatory approvals are not received by November 13, 1996,
or if such approvals are received but the agreements with Telesat have not
been amended as described above, Satellite No. 2 will be launched into the
119(degrees) W.L. orbital location on the February Launch Date, the December
Launch Date will be deferred with associated penalties and Tempo will place
Satellite No. 1 in storage for future launch into the 82(degrees) W.L. orbital
location or otherwise to be disposed of or deployed in such manner as Tempo
may determine. See "--Tempo Option."
If regulatory and other conditions to the Telesat Transaction are satisfied
and the Telesat Transaction is consummated with either or both of the Company
Satellites, the Company and the Partnership have been discussing the Company's
making available to PRIMESTAR Partners all of the rights and benefits
(including the purchase price for the Company Satellites), and PRIMESTAR
Partners assuming all of the obligations (including the repurchase price for
the 27 transponders to be repurchased from Telesat), of the Company under the
agreements with Telesat. Further, if one of the Company Satellites is launched
into 119(degrees) W.L., the
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discussions between the Company and the Partnership contemplate that the
Company would make 100% of the capacity on such satellite available to the
Partnership and that the Partnership would reimburse the Company for the costs
of operating such satellite. In each of the foregoing circumstances, the
Company would be unconditionally released from any obligation it may have to
repay PRIMESTAR Partners for its funding of the costs of constructing and
launching the Company Satellites. However, if the Company and PRIMESTAR
Partners are unable to reach agreement with respect to the foregoing, the
Company will consider other potential uses for the available capacity on the
Company Satellites, which could include using such capacity in connection with
another DBS business opportunity. See "--Tempo Option."
Tempo DBS System. Tempo's Construction Permit authorizes the construction of
a DBS system with 11 frequency channels at 119(degrees) W.L. and 11 frequency
channels at 166(degrees) W.L. The 119(degrees) W.L. position is generally
visible to HSDs throughout all fifty states; the 166(degrees) is visible only
in the western half of the continental U.S. as well as Alaska and Hawaii.
Under Tempo's Satellite Construction Agreement with Loral, Loral is committed
to supply to Tempo a total of five high power satellites (including the
Company Satellites) and other items relating to such satellites. Subject to
completion of the Telesat Transaction, the Company has exercised its option
under the Satellite Construction Agreement to purchase Satellite No. 3. Under
those circumstances, Satellite No. 3 would be designated for deployment in the
119(degrees) W.L. orbital position and scheduled for launch by May 1998
pursuant to Tempo's Construction Permit. See "Risk Factors--Risks of Adverse
Government Regulations and Adjudications--Construction Permit."
If the Telesat Transaction is not consummated, the Company intends to deploy
one of the Company Satellites in the 119(degrees) W.L. orbital position and to
place the second Company Satellite in storage for future deployment or other
disposition as determined by Tempo. See "Risk Factors--Risks of Satellite
Defect, Loss or Reduced Performance."
Satellite Launches. Pursuant to the Satellite Construction Agreement,
following the launch of a satellite, Loral will conduct in-orbit testing.
Delivery of a satellite takes place upon Tempo's acceptance of such satellite
after completion of in-orbit testing ("Delivery"). Subject to certain limits,
Loral must reimburse Tempo for Tempo's actual and reasonable expenses directly
incurred as a result of any delays in the Delivery of satellites. The in-orbit
useful life of each satellite is designed to be a minimum of 12 years. If in-
orbit testing confirms that the satellite conforms fully to specifications and
the service life of the satellite will be at least 12 years, Tempo is required
to accept the satellite. If in-orbit testing determines that the satellite
does not fully conform to specifications but at least 50% of its transponders
are functional and the service life of the satellite will be at least six
years, Tempo is required to accept the satellite but is entitled to receive a
proportionate decrease in the purchase price. If Loral fails to deliver a
satellite, it has 29 months to deliver, at its own expense, a replacement
satellite. Loral may make four attempts to launch the two Company Satellites;
however, if the two Company Satellites are not delivered in such four
attempts, Tempo may terminate the Satellite Construction Agreement. Tempo also
may terminate the contract in the event of two successive satellite failures.
Loral has warranted that, until the satellites are launched, the satellites
will be free from defects in materials or workmanship and will meet the
applicable performance specifications. In addition, Loral has warranted that
all items other than the satellites delivered under the Satellite Construction
Agreement will be free from defects in materials or workmanship for one year
from the date of their acceptance and will perform in accordance with the
applicable performance specifications. Loral bears the risk of loss of the
Company Satellites until Delivery. Upon Delivery, title and risk of loss pass
to Tempo. However, Loral is obligated to carry risk insurance on each
satellite covering the period from the launch of the satellite through an
operating period of 180 days. Such risk insurance will cover (i) the cost of
any damages due under the Satellite Construction Agreement; (ii) the cost of
delivery of a replacement satellite in the event of a satellite failure; and
(iii) the refund of the full purchase price for each undelivered Company
Satellite if Loral fails to deliver both Company Satellites after four
attempts. Loral is also required to obtain insurance indemnifying Tempo from
any third party claims arising out of the launch of a satellite.
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Tempo Option. In February 1990, Tempo entered into an option agreement with
PRIMESTAR Partners (the "Option Agreement"), granting PRIMESTAR Partners the
right and option (the "Tempo Option"), upon exercise, to purchase or lease
100% of the capacity of the DBS system to be built, launched and operated by
Tempo pursuant to the Construction Permit. Under the Option Agreement, upon
the exercise of the Tempo Option, PRIMESTAR Partners would be obligated to pay
Tempo $1,000,000 (the "Exercise Price") and lease or purchase the entire
capacity with the purchase price (or aggregate loan payments) being sufficient
to cover the cost of constructing, launching and operating such proposed
system. In connection with the Tempo Option and certain related matters, Tempo
and PRIMESTAR Partners subsequently entered into two letter agreements (the
"Tempo Letter Agreements"), which provided for, among other things, the
funding by PRIMESTAR Partners of milestone and other payments due under the
Satellite Construction Agreement, and certain related costs, through advances
by the Partnership to Tempo. The Partnership financed such advances to Tempo
through borrowings under the PRIMESTAR Credit Facility which was in turn
supported by letters of credit arranged for by affiliates of the partners of
the Partnership (other than GEAS). At June 30, 1996, the aggregate funding
provided to Tempo by PRIMESTAR Partners was $386,219,000, and the balance due
under the PRIMESTAR Credit Facility was $433,000,000, including accrued
interest.
The Tempo Letter Agreements permit the Partnership to apply its advances to
Tempo against any payments (other than the Exercise Price) due under the Tempo
Option and would not require Tempo to repay such advances unless the
Partnership elected to stop funding amounts due under the Satellite
Construction Agreement or failed to exercise the Tempo Option within the
period provided for in the Tempo Letter Agreements, in which event Tempo
could, in lieu of making such repayment, elect to assign all of its rights
relating to the Company Satellites to the Partnership.
On February 29, 1996, Tempo notified PRIMESTAR Partners of Tempo's belief
that PRIMESTAR Partners had failed to effectively exercise the Tempo Option
and that such failure had resulted in the termination of the Tempo Option
pursuant to the Tempo Letter Agreements. In that connection, Tempo advised the
Partnership that, based on and assuming the effective termination of the Tempo
Option, Tempo would reimburse the Partnership for its advances to Tempo by
assuming the Partnership's indebtedness for borrowed money under the PRIMESTAR
Credit Facility, to the extent used to fund such advances.
Tempo's belief that PRIMESTAR Partners failed to effectively exercise the
Tempo Option is based, among other things, on the fact that despite the
Partnership's notice to Tempo at the July 29, 1994 meeting of the Partners
Committee of its exercise of the Tempo Option, since such date, PRIMESTAR
Partners has failed to take any of the actions contemplated by the Option
Agreement to be taken following exercise of the Tempo Option, including (i)
advising Tempo whether it intends to purchase or lease the capacity of the DBS
system referred to in the Option Agreement, (ii) negotiating an agreement of
purchase or lease with Tempo and (iii) paying Tempo the Exercise Price.
Moreover, in December 1995, a representative of PRIMESTAR Partners informed
the Company that the July 1994 exercise of the Tempo Option had been intended
as a conditional exercise, although conditional exercises are not contemplated
by the Option Agreement, and that the conditions upon which the Tempo Option
had purportedly been exercised had not been met.
Counsel for PRIMESTAR Partners subsequently notified Tempo that the
Partnership disagreed with the positions advanced by Tempo in the February 29
letter, believed that the Partnership has effectively and irrevocably
exercised the Tempo Option and was asserting certain rights to the Company
Satellites. Counsel for PRIMESTAR Partners also advised Tempo that the
Partnership would impede any attempt by Tempo to repay PRIMESTAR Partners'
advances. The Partners Committee of the Partnership has failed, however, to
vote to confirm that the Partnership has irrevocably and unconditionally
exercised the Tempo Option. The Company believes that the Partnership's
position is based primarily on equitable arguments relating to the advances
made by PRIMESTAR Partners to Tempo under the Tempo Letter Agreements and
their misreading of the terms of the Option Agreement and the Tempo Letter
Agreements. The Company believes the PRIMESTAR Partners' claims regarding the
Company Satellites and the Tempo Option are without merit, but there can be no
assurance that Tempo's position would prevail in the event of any litigation
regarding this controversy.
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The Company and PRIMESTAR Partners are currently attempting to resolve their
disagreement regarding the Tempo Option. In that connection, the Company and
PRIMESTAR Partners have discussed the alternatives available to the Company
for deployment of the Company Satellites and the terms and provisions under
which the Company would make available to PRIMESTAR Partners 100% of the
capacity of one or more Company Satellites as so deployed. Although the
Company and PRIMESTAR Partners have not reached agreement with respect to any
such resolution of their dispute, and there can be no assurance that any such
resolution can be reached, or can be reached on terms acceptable to the
Company, the Company does currently believe that its dispute with PRIMESTAR
Partners will be resolved and does not believe that such dispute or its
resolution is reasonably likely to have a material adverse effect on the
Company.
COMPETITION
The business of providing subscription and pay television programming is
highly competitive. The Company faces competition from numerous other
companies offering video, audio and data products and services. The Company's
existing and potential competitors comprise a broad range of companies engaged
in communications and entertainment, including cable operators, other digital
satellite program providers, wireless cable operators, television networks and
home video products companies, as well as companies developing new
technologies. Many of the Company's competitors have greater financial,
marketing and programming resources than the Company. The Company expects that
quality and variety of programming, quality of picture and service and cost
will be the key bases of competition. See "Risk Factors--Competitive Nature of
Industry."
Cable Television. Cable television is currently available for purchase by as
much as 97% of the approximately 96 million U.S. television households. The
cable television industry is an established provider of multichannel
programming, with approximately 66% of total U.S. television households
subscribing. Cable systems typically offer 25 to 78 channels of programming at
an average monthly subscription price of approximately $33.
The Company expects to encounter a number of challenges in competing with
cable television providers. First, cable television providers benefit from
their entrenched position in the domestic consumer marketplace. Second,
satellite television systems generally have not found it efficient to provide
any local broadcast programming and, under the Satellite Home Viewer Act of
1994, cannot provide broadcast network programming to subscribers except in
those limited areas where network programming is unavailable through local
affiliates. Accordingly, most PRIMESTAR(R) subscribers cannot obtain such
programming without utilizing a standard television antenna (traditional
rooftop or set-top antenna) or purchasing some level of cable service. Third,
since reception of digital satellite signals requires clear line of sight to
the satellite, it may not be possible for some households served by cable to
receive PRIMESTAR(R) as a result of large adjacent structures or other
obstacles. In addition to households lacking a clear line of sight to the
satellite, PRIMESTAR(R) is not available to households in apartment complexes
or other MDUs that do not facilitate or allow the installation of satellite
television equipment. Fourth, because IRDs are significantly more expensive
than analog cable converters, existing cable operators are able to offer their
subscribers the ability to have fully functional cable on multiple television
sets in a household without additional cost.
The Company believes, however, that it can successfully compete with cable
television providers. While cable companies currently serve a majority of the
U.S. television market, the Company believes many may not be able to provide
the quality and variety of programming offered by digital satellite service
providers until they significantly upgrade their coaxial systems. Many cable
television providers are in the process of upgrading their systems and other
cable operators have announced their intentions to make significant upgrades.
Many proposed upgrades, such as conversion to digital format, fiber optic
cabling, advanced compression technology and other technological improvements,
when fully completed, will permit cable companies to increase channel
capacity, thereby increasing programming alternatives, and to deliver a better
quality signal. However, although cable systems with adequate channel capacity
may offer digital service without major rebuilds and the first such offerings
are expected in late 1996, the Company believes that, given the limit of
current compression technology, other cable systems that have limited channel
capacity will have to be upgraded to add bandwidth in
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order to provide digital service, which upgrades will require substantial
investments of capital and time to complete industry-wide. As a result, the
Company believes that there will be a substantial delay before cable systems
can offer programming services equivalent to digital satellite television
providers on a national basis and that some cable systems may never be
upgraded.
The Company believes that its current strategy of targeting rural and other
unpassed or underserved communities which may avoid head-to-head competition
with major cable television systems, partially offsets the cable industry's
entrenched position in the domestic consumer marketplace. The Company also
believes that anticipated advances of cable television, such as interactivity
and expanded channel capacity, may not be widely available in the near term at
a reasonable cost to the consumer. Moreover, if the substantial capital costs
of those advances, when available, are passed on to the consumer, it will
ultimately enhance the attractiveness of digital satellite television
programming.
Other Digital Satellite Service Providers. In addition to the Company,
several other companies offer, or are expected to offer, digital satellite
services and are, or will be, positioned to compete with the Company for home
satellite subscribers.
DirecTv successfully launched its first satellite in December 1993, its
second satellite in August 1994 and a third satellite in June 1995 as an in-
orbit spare. The third satellite may also be operated by DirecTv to provide
additional capacity. DirecTv's satellites, which are high power satellites,
are located at 101(degrees) W.L. DirecTv operates 27 transponders on each of
its existing satellites, enabling it to offer over 175 channels of digital
programming. As of July 31, 1996, according to trade publications, DirecTv
served approximately 1.8 million Authorized Units.
AT&T Corp. ("AT&T") and DirecTv have entered into an exclusive agreement for
AT&T to market and distribute DirecTv's DBS service and related equipment to
AT&T's large customer base. As part of the agreement, AT&T is making an
initial investment of approximately $137.5 million to acquire 2.5% of the
equity of DirecTv with an option to increase its investment up to 30% over
five years. This agreement provides a significant base of potential customers
for the DirecTv DBS system and allows AT&T and DirecTv to offer customers a
package of digital entertainment and communications services. As a result, the
Company is at a competitive disadvantage marketing to these customers. AT&T
and DirecTv also announced plans to jointly develop new multimedia services
for DirecTv under the agreement. In addition, affiliates of the National Rural
Telecommunications Cooperative have acquired territories in rural areas of the
U.S. as distributors of DirecTv programming.
USSB owns and operates five transponders on DirecTv's first satellite and
offers a programming service separate from DirecTv's service, with, as of
December 31, 1995, over 25 channels of premium video programming not available
from DirecTv. Approximately one-half of DirecTv's 1.8 million Authorized Units
receive USSB programming. In addition, USSB has a construction permit from the
FCC that would allow it to build and launch two high power DBS systems, one at
110(degrees) W.L. (with three transponders) and one at 148(degrees) W.L. (with
eight transponders). The 110(degrees) W.L. orbital location would enable USSB
to provide a second high power DBS service to the continental U.S., although
with limited channel capacity. The 148(degrees) W.L. slot would allow USSB to
transmit signals to viewers in Alaska and Hawaii and could provide programming
between the U.S. and the Pacific Rim.
EchoStar launched a high power satellite in December 1995, commenced
national broadcasting of programming channels in March 1996 and, as of June
30, 1996, broadcasts over 100 such channels. It is expected to increase its
program offering to approximately 125 channels when its system is fully
operational. EchoStar was assigned 11 transponders at 119(degrees) W.L., the
same orbital location as Tempo, and acquired 10 transponders at such location,
one transponder at 110(degrees) W.L. and 11 transponders at 175(degrees) W.L.
through a merger with DirectSat. In addition, EchoStar acquired 24 frequencies
at 148(degrees) W.L. for $52.3 million in an FCC auction held in January 1996
of 28 frequencies at the 110(degrees) W.L. orbital location and 24 frequencies
at the 148(degrees) W.L. orbital location (the "FCC Auction").
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MCI acquired the 28 frequencies at 110(degrees) W.L. in the FCC Auction for
$682.5 million. Thereafter, MCI entered into a joint venture with News Corp.
to build and launch a high power digital satellite system at 110(degrees) W.L.
The Company expects the MCI/News Corp. joint venture to commence broadcasting
operations of 175 programming channels by the end of 1997.
Alphastar commenced offering approximately 150 digital video and audio
channels of programming via a medium power FSS satellite in mid-1996 and plans
to expand to 200 channels by the end of 1997. The Alphastar service uses MPEG
2/DVB digital compression technology. Alphastar subscribers must generally use
36 inch satellite dishes, similar in size to those currently used by
PRIMESTAR(R) subscribers, rather than the 18 inch satellite dishes used by
customers of the high power services of DirecTv, USSB and EchoStar.
In addition, potential competitors may provide television programming at any
time by leasing transponders from an existing satellite operator. However, the
number of transponders available for lease on any one satellite is generally
limited, making it difficult to provide sufficient channels of programming for
a viable system.
The Company believes that it can successfully compete with other digital
satellite service providers. Unlike other current suppliers of digital
satellite television, the Company does not require customers to buy satellite
reception equipment. PRIMESTAR By TCI is marketed as a service, with
programming, equipment rental, maintenance and 24-hour customer service
included in the monthly price, which currently ranges from $32.99 to $54.99.
In addition, each of the PRIMESTAR By TCI programming packages includes a free
monthly programming guide. The up-front costs to new subscribers of PRIMESTAR
By TCI, who are charged only an installation fee (currently $199) and the
first month's programming and equipment rental fees, are generally lower than
the up-front costs to new subscribers of PRIMESTAR(R)'s competitors, who
typically must purchase and install an HSD, IRD and related equipment.
Moreover, since the Company generally owns, services and installs all home
reception equipment, the Company protects its subscribers from the
inconvenience of equipment failure, maintenance concerns, obsolete technology,
self-installation and expired warranties. The Company believes that when the
cost of equipment is factored in, its service is priced competitively,
compared to the respective prices of other current digital satellite service
providers.
C-band Satellite Program Distributors. The Company also competes with C-band
satellite program distributors, such as the Netlink USA/Superstar Satellite
Entertainment joint venture ("Joint Venture"). The Joint Venture is a
consolidated subsidiary of United Video Satellite Group, Inc. ("UVSG"). UVSG
is a consolidated subsidiary of TCI that is included in the TCI Group. The
Liberty Media Group holds the interest in the Joint Venture that is not owned
by UVSG. TCI's interests in the C-band satellite business are not being
transferred to the Company in connection with the Distribution.
C-band systems have been popular, (mostly in rural and semi-rural areas)
since the late 1970s, and in the aggregate serve approximately 2.1 million
subscribers. However, digital satellite television systems use Ku-band
frequencies that can be received by less expensive systems with significantly
smaller dishes than those used with C-band frequencies. As a result of the
smaller dish size, digital satellite television systems are more widely
accepted by consumers than C-band systems, particularly in urban areas.
Wireless Cable Systems. Other potential competitors of the Company are
multi-channel multi-point distribution systems ("MMDS"), which deliver
programming services over microwave channels to subscribers with special
antennas, and other so-called "wireless cable" systems. According to Wireless
Cable Association International, there are currently an estimated 190 wireless
cable systems operating in the U.S., serving an estimated 950,000 subscribers,
mostly with limited channel, analog service. However, the number of wireless
cable systems is likely to increase as virtually all markets have been
licensed or tentatively licensed, and developments in digital compression
technology will significantly increase the number of channels and video and
audio quality of wireless cable systems. Moreover, wireless cable systems may
provide their customers with local programming, a potential advantage over
digital satellite television systems. In 1995, several large telephone
companies acquired significant ownership in numerous wireless cable companies.
This infusion of
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money into the wireless cable industry can be expected to accelerate its
growth and its competitive impact. However, while it is expected that most
large wireless operators backed by local telephone companies will upgrade to
digital technology over the next several years, such upgrades will require the
installation of new digital decoders in customers' homes and modifications to
transmission facilities, at a potentially significant cost. Wireless cable
also generally requires direct line of sight from the receiver to the
transmitter tower, which creates the potential for substantial interference
from terrain, buildings and foliage.
Telephone Companies. In addition to the DBS system planned by the MCI/News
Corp. joint venture and AT&T's agreement with, and investment in, DirecTv,
certain regional telephone companies and other long distance telephone
companies could become significant competitors in the future, as they have
expressed an interest in becoming subscription television providers.
Furthermore, legislation recently passed by Congress removes barriers to entry
which previously inhibited telephone companies from competing, or made it more
difficult for telephone companies to compete, in the provision of video
programming and information services. Certain telephone companies have
received authorization to test market video and other services in certain
geographic areas using fiber optic cable and digital compression over existing
telephone lines. Estimates for the timing of wide-scale deployment of such
multichannel video service vary, as several telephone companies have pushed
back originally announced deployment schedules.
As more telephone companies begin to provide subscription television
programming and other information and communications services to their
customers, additional significant competition for subscribers will develop.
Among other things, telephone companies have an existing relationship with
substantially every household in their service area, substantial financial
resources, and an existing infrastructure and may be able to subsidize the
delivery of programming through their position as the sole source of telephone
service to the home.
VHF/UHF Broadcasters. Most areas of the U.S. are covered by traditional
territorial over-the-air VHF/UHF broadcasters. Consumers can receive from
three to ten channels of over-the-air programming in most markets. These
stations provide local, network and syndicated programming free of charge, but
each major market is generally limited in the number of programming channels.
Congress is expected to consider the release of additional digital spectrum
for use by VHF/UHF broadcasters later this year.
PRIMESTAR PARTNERSHIP AGREEMENT
Pursuant to the PRIMESTAR Partnership Agreement, the business and affairs of
the Partnership are managed and controlled by the Partners Committee, composed
of representatives of the partners and two independent members. The Company
has two voting representatives on the Partners Committee, Time Warner has two
voting representatives, and Cox, Comcast, Continental, Newhouse and G.E. each
have one voting representative. Ordinary decisions of the Partners Committee
require the consent of a majority of the members of the Partners Committee,
which majority must include a majority of the representatives of the partners.
Certain extraordinary decisions of the Partners Committee, including, without
limitation, decisions regarding the dissolution, merger or sale of
substantially all assets of the Partnership; the admission of additional
partners; calls for capital contributions; the approval of the annual budget;
the appointment or dismissal of Partnership senior management; the
determination of the Partnership's policies with respect to the distribution
of its programming services; the selection of satellites (including successor
satellite capacity, the decision whether the Partnership should provide
services at BSS or higher frequencies and the decision to exercise the End-of-
Life Option); the determination to take any action that would cause the amount
of the letters of credit required to be issued in connection with the
Partnership's obligations under the GE-2 Agreement to exceed $100,000,000; the
decision to effect certain material changes to the GE-2 Agreement and certain
related agreements with respect to the letters of credit issued in connection
with the GE-2 Agreement; and the decision to provide any optional letters of
credit, or pledge, grant a security interest in or otherwise create a lien on
any material assets of the Partnership to secure the payment of reimbursement
obligations of the Partnership with respect to letters of credit issued in
connection with the GE-2 Agreement require, in addition to a majority vote,
the affirmative vote of at least six of the nine partner representatives on
the Partners Committee (assuming that no partner representative is required to
abstain in such vote), or such other vote as shall be required by the
PRIMESTAR Partnership
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Agreement if one or more partner representatives are required to abstain in
such vote under the terms of the PRIMESTAR Partnership Agreement because of
such partner's, or an affiliate's, interest in the outcome thereof.
Pursuant to the PRIMESTAR Partnership Agreement, if the Company fails to pay
its share of capital contributions or loans that the partners agree to require
or that are contemplated by budgets or business plans approved by the
partners, or that are otherwise necessary in order to satisfy partnership
commitments, the Company's interest in the Partnership will be diluted and, if
such interest is diluted to less than 5%, its right to vote or exercise
certain other rights may be forfeited. See "Risk Factors--Dependence on
PRIMESTAR Partners."
CERTAIN AGREEMENTS
In addition, the Company is subject to the provisions of certain agreements
that may limit the ability of the Company to engage in, or invest in entities
that engage in, certain businesses, other than through the Partnership.
Tag-Along Agreement. Tempo is a party to the Tag-Along Agreement, originally
entered into by and among Cox Enterprises, Inc., Comcast, Continental and
Newhouse (subsidiaries of each of which are partners of the Partnership),
Tempo, TCIC and TCI Development Corporation, a subsidiary of TCIC. The Tag-
Along Agreement provides that if any party to the agreement, directly or
indirectly through any person controlled by such party (an "Investing Party"),
engages in, or makes an equity investment in any entity engaging or proposing
to engage in, the business of providing television programming by uplink to
BSS or higher frequency domestic satellite transponders, or otherwise becomes
entitled to exercise a management role with respect to any such entity, at any
time that such party or a person controlled by such party is a partner in the
Partnership, or within one year after it ceases to be a partner, then, subject
to certain exceptions, such party shall provide the other parties with a
written offer to participate in such investment or other transaction on terms
and conditions comparable to those available to the Investing Party, pro rata
in accordance with their respective percentage interests in the Partnership at
the time of such offer. The Tag-Along Agreement further provides that if a
party transfers assets to a person that is not majority owned or controlled by
such party but which person either is the "ultimate parent" of, or has the
same "ultimate parent" as, such party, then such party must cause such
affiliate to become a party to the Tag-Along Agreement. The term "ultimate
parent" as used in the Tag-Along Agreement has the meaning ascribed to such
term in the Hart-Scott-Rodino Antitrust Improvement Act of 1974, as amended
("HSR Act"). Generally under the HSR Act, the "ultimate parent" of a person is
an entity that directly or indirectly owns at least 50% of the voting
securities of such person or has the contractual right to designate 50% or
more of a board of directors of such person. The Tag-Along Agreement will
terminate upon the termination or dissolution of the Partnership, or, if
earlier, when the parties to the Tag-Along Agreement and their affiliates
cease to be partners of the Partnership.
Partnership Agreement Provisions Regarding Investments in Similar
Businesses. The PRIMESTAR Partnership Agreement provides, among other things,
that if any partner, or an affiliate of a partner, engages in, or makes an
equity investment in any entity engaging or proposing to engage in, the
business of providing television programming by uplink to FSS, BSS or higher
frequency domestic satellite transponders, directly or indirectly to HSDs, or
otherwise becomes entitled to exercise a management role with respect to any
such entity, then such partner (the "Notifying Partner") shall be required to
give notice of such investment or other transaction to the Partnership and the
other partners, and the Partnership, by vote of the Partners Committee, with
the Notifying Partner abstaining, shall have the right, but not the
obligation, to elect one of the following courses of action: (i) to remove the
Notifying Partner's representative from the Partners Committee, in which case
the Notifying Partner will no longer be entitled to make capital contributions
to the Partnership or to receive any financial or other information about the
Partnership, other than audited year-end financial statements and tax-related
information; or (ii) to purchase the Notifying Partner's entire interest in
the Partnership for a purchase price equal to the fair market value thereof,
payable in cash or, at the option of the Partnership, for a combination of
cash and a three-year promissory note. Notwithstanding the foregoing, the
Partnership will not have the right to exercise either of the foregoing
alternatives if the Notifying Partner, or its affiliate, acquires an equity
interest in an entity that engages in, or proposes to engage in, the business
of uplinking television programming to BSS
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or higher frequency domestic satellite transponders, and the Partnership does
not then uplink its programming to BSS or higher frequency transponders and
does not, within 120 days thereafter, make a commitment to such transmission
method comparable to the commitment of such other entity. The Partnership will
also not have the right to exercise either of such remedies if the Notifying
Partner, or its affiliate, offers each other partner who did not vote against
the Partnership making a commitment to such transmission method, or its
affiliate, an opportunity to participate with the Notifying Partner or its
affiliate in its equity interest in such BSS business.
EMPLOYEES
The Company had approximately 1,500 employees as of June 30, 1996. None of
the Company's employees are represented by a union and the Company believes
its employee relations are good.
After the Distribution, TCI will provide to the Company certain services and
other benefits, including certain administrative and other services that were
provided to the Company by TCI prior to the Distribution. Such services will
include (i) tax reporting, financial reporting, payroll, employee benefit
administration, workers' compensation administration, telephone, fleet
management, package delivery, management information systems, billing, lock
box, remittance processing and risk management services, (ii) other services
typically performed by TCI's accounting, finance, treasury, corporate, legal,
tax, benefits, insurance, facilities, purchasing, fleet management and
advanced information technology department personnel, (iii) use of
telecommunications and data facilities and of systems and software developed,
acquired or licensed by TCI from time to time for financial forecasting,
budgeting and similar purposes, including without limitation any such software
for use on personal computers, in any case to the extent available under
copyright law or any applicable third-party contract, (iv) technology support
and consulting services, and (v) such other management, supervisory, strategic
planning or other support services as the Company and TCI may from time to
time mutually determine to be necessary or desirable. See "Arrangements
Between TCI and the Company After the Distribution--Transition Services
Agreement."
PROPERTIES
The Company owns no real property. The Company has entered into
noncancellable operating leases for all of its facilities, all of which expire
at various times through 2001. The Company believes that such facilities are
in good condition and are suitable and adequate for its business operations
for the foreseeable future.
The following table sets forth certain information concerning the Company's
principal properties as of August 31, 1996:
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE EXPIRATION OF
DESCRIPTION/USE LOCATION FOOTAGE LEASE
--------------- -------- ----------- -------------
<S> <C> <C> <C>
Corporate Headquarters.. Englewood, Colorado 60,471 6/30/2001
National Call Center.... Englewood, Colorado 50,009 6/30/2001
Northwest Regional Of-
fice................... Lake Oswego, Oregon 3,236 3/31/1998
Northeast Regional Of-
fice................... State College, Pennsylvania 7,073 8/31/2000
Great Lakes Regional Of-
fice................... St. Charles, Missouri 4,300 2/28/1998
South Central Regional
Office................. Farmers Branch, Texas 4,328 8/31/1998
Southeast Regional Of-
fice................... Atlanta, Georgia 3,835 1/31/1997(1)
Stand-Alone Office...... Hazelhurst, Georgia 2,300 7/1/2000(1)
Stand-Alone Office...... Bogart, Georgia 2,400 5/1/1998(1)
</TABLE>
- --------
(1) The leases for the Southeast Regional Office and the Stand-Alone Office
located in Bogart, Georgia were entered into by TCI of Georgia, Inc. and
the lease for the Stand-Alone Office in Hazelhurst, Georgia was entered
into by TCI Cablevision of Georgia, in each case for the use and benefit
of the Company. The Company pays the rent on these facilities.
The Company leases additional properties as field offices to support its
sales force.
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LEGAL PROCEEDINGS
The Company is not a party to any litigation, other than certain legal
proceedings in the ordinary course of business that the Company believes will
not have a material adverse effect on the Company's financial position or
results of operations.
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REGULATORY MATTERS
GENERAL
Tempo, as the holder of a U.S. DBS permit, and WTCI, as an applicant for a
new facility to uplink signals to satellites to provide DBS service to the
U.S., are subject to the regulatory authority of the FCC. Authorizations and
permits issued by the FCC are required for the operation of Tempo's satellites
and for its and WTCI's uplink facilities that will be used to transmit signals
to such satellites or, if the Telesat Transaction is consummated, the 27
transponders on the Company Satellites to be repurchased by the Company from
Telesat in connection with the Telesat Transaction. As a distributor of DBS
programming, Tempo and its affiliates may also be affected by numerous laws
and regulations, including the Communications Act of 1934, as amended (the
"Communications Act").
Although the non-technical aspects of high power DBS operations are
generally subject to less regulation than terrestrial broadcasting, some
regulations do apply and others are proposed. For example, high power DBS
operators which control the video programs they distribute, and DBS licensees
or permittees which are licensed as broadcasters, are subject to equal
employment opportunity requirements. Regulations proposed by the FCC (but not
yet adopted) include access requirements for Federal political candidates,
limitations on charges for advertising by political candidates and (subject to
the outcome of a pending constitutional challenge) a requirement that high
power DBS providers reserve 4 to 7 percent of channel capacity for
noncommercial programming of an educational and informational nature.
While Tempo and WTCI have generally been successful to date with respect to
compliance with regulatory matters, there can be no assurance that they will
succeed in obtaining all requisite regulatory approvals for their operations
without the imposition of restrictions on or other adverse consequences to
Tempo, WTCI or the Company.
FCC PERMITS AND LICENSES
Tempo DBS Construction Permit. Tempo holds a Construction Permit issued by
the FCC authorizing construction of two or more satellites to operate 11
transponders at an orbital location at 119(degrees) W.L. and 11 transponders
at an orbital location at 166(degrees) W.L. As the holder of a DBS permit,
Tempo is subject to FCC jurisdiction and review primarily for: (i)
authorization of individual satellites (i.e., meeting minimum financial,
legal, and technical standards) and earth stations, (ii) avoiding interference
with other radio frequency transmitters, (iii) complying with rules the FCC
has established specifically for holders of U.S. DBS authorizations and
receivers, and (iv) complying with applicable provisions of the Communications
Act. The FCC's DBS construction permits are also conditioned on satisfaction
of ongoing construction and related obligations. The FCC's DBS rules require
that a DBS permittee place its satellites in operation within six years
following the initial grant of a construction permit. Tempo's Construction
Permit was issued in May 1992, and the permit would expire in May 1998, absent
completion of the system or an approved extension of time. At present, Tempo
must continue to demonstrate that it is exercising due diligence in
progressing toward that goal.
Tempo believes it is currently meeting this requirement through the
Satellite Construction Agreement with Loral, which is currently constructing
the Company Satellites and related ground equipment. If the Company Satellites
are sold to Telesat in the proposed Telesat Transaction, Tempo has exercised
an option with Loral for the delivery of an additional satellite prior to the
expiration of its permit to complete its DBS system at 119(degrees) W.L.
There can be no assurance that Tempo will be able to comply with the FCC's
due diligence obligations or that the FCC will determine that Tempo has
complied with such due diligence obligations. Tempo's permit and its
compliance with construction due diligence requirements have been contested in
FCC proceedings by current and potential DBS competitors, including MCI/News
Corp., DirecTv, EchoStar, USSB, Dominion Video Satellite, Inc. and DirectSat.
If Tempo is unable to meet the terms of its permit, it would be necessary to
apply to the FCC for an extension of time to complete its DBS system. Tempo
cannot be certain that an extension would be granted.
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In addition to the general conditions placed on DBS permits, Tempo's permit
was originally subject to the condition that in areas served by TCI-affiliated
cable systems, Tempo or any related entities shall not offer or provide its
DBS service (1) to subscribers exclusively or primarily as an ancillary or
supplementary cable service, and (2) in a manner that would allow subscribers
of TCI-affiliated cable systems to receive Tempo's DBS service under terms and
conditions different from those offered or provided to consumers who are not
subscribers to TCI-affiliated cable systems.
In a rulemaking proceeding concluded in December 1995, the FCC removed the
marketing conditions set forth above. DirecTv, however, has appealed the
Commission's decision to the U.S. Court of Appeals for the District of
Columbia Circuit, arguing, among other things, that the Commission's decision
to remove the conditions on Tempo's permit was arbitrary and capricious. Tempo
cannot predict whether the Court of Appeals will uphold the FCC's order.
In July 1996, WTCI filed an application with the FCC for authorization to
construct and operate an earth station to uplink video programming to Tempo's
proposed DBS system utilizing the 119(degrees) W.L. orbital slot. In October
1996, EchoStar and DirectSat jointly filed an objection to the application,
alleging among other things that WTCI's uplink station would interfere with
operations of EchoStar's and DirectSat's DBS satellites at the same orbital
location. WTCI filed an opposition to EchoStar's and DirectSat's objection on
October 28, 1996 demonstrating that no harmful interference will result from
its proposed operations and responding to the objectors' other comments. If
the FCC denies WTCI's application, Tempo will be unable to operate its system.
WTCI expects, but cannot assure, that its application will be approved.
In July 1993, Tempo filed an application with the FCC proposing minor
modifications to the technical design of the satellites. Numerous existing and
potential DBS competitors have opposed Tempo's application. Approval by the
FCC of the proposed modifications is necessary before Tempo may launch the
satellites. Tempo expects that the FCC will act on the application when Tempo
notifies it of Tempo's intention to launch the satellites. Tempo expects, but
cannot assure, that the application will be approved.
Near the expected launch date of its satellites, Tempo will file a request
for final launch authority. Tempo will also be required to file an application
for a license to operate its satellites in orbit. Tempo expects that the FCC
will approve these requests, but cannot assure the ultimate outcome. FCC
licenses must be renewed at the end of each ten-year license term. FCC
licenses are generally renewed in the ordinary course, absent misconduct by
the licensee.
Uplink License Application for Telesat Transaction. On March 26, 1996, WTCI
filed an application with the FCC for authorization to construct and operate
an earth station to uplink video programming to Tempo's transponders on the
Company Satellites, which will be launched into a Canadian DBS orbital
location (82(degrees) W.L.) pursuant to the Telesat Transaction. On July 1,
1996, the Executive Branch Letter was filed with the FCC recommending that the
FCC treat the application as premature and raising concerns regarding the
application relating to international agreement obligations, Canadian content
restrictions, Canadian licensing restrictions, and domestic competition
policy. On July 15, 1996, the FCC dismissed WTCI's application, without
prejudice, on the ground that the application was premature because Canada had
not yet issued licenses to Telesat, which will operate the satellite
containing the transponders to which WTCI intended to uplink. The FCC's order
expressly did not address any of the substantive issues raised by WTCI's
application or by the various petitions to deny WTCI's application that had
been received from the Company's competitors. The FCC indicated, however, that
if WTCI refiled its application, it would take into account concerns raised in
the Executive Branch Letter with respect to the application.
On August 14, 1996, WTCI filed a petition seeking reconsideration of such
dismissal on the grounds that, although a formal license had not been issued,
Industry Canada had in fact issued all the pre-launch authority it customarily
granted to satellite applicants, and that Telesat had received from Industry
Canada its standard support in principle for its proposal. In addition, WTCI
contended that none of the concerns raised in the Executive Branch Letter
should impede grant of WTCI's application. There can be no assurance, however,
that the FCC will respond favorably to the petition. Furthermore, although the
Company believes that WTCI's proposal is in the public interest and fully
consistent with applicable FCC rules and policies (as well as applicable
treaties and international agreements), there can be no assurance that the FCC
will not deny such application on substantive grounds when it reconsiders the
matter, and the Company cannot predict whether WTCI will ultimately receive
the necessary authorizations to operate the planned uplink station. In
addition, although the
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FCC is not bound by the Executive Branch Letter or the positions taken
therein, the Company cannot predict whether the Executive Branch Letter or any
subsequent actions taken by such other government departments will affect the
outcome at such time as the FCC considers WTCI's application on its merits.
See "Risk Factors--Risks of Adverse Government Regulations and Adjudications."
In May 1996, the FCC adopted a notice of proposed rulemaking ("NPRM"), known
as "DISCO II" (an acronym for "Domestic International Satellite Consolidation
Order") which would provide rules governing access by users in the U.S. to
foreign satellite systems. The notice proposes that the FCC will license
uplink stations to foreign satellites only to the extent that U.S. satellite
systems have effective competitive opportunities to provide similar services
in the foreign market. However, the FCC has tentatively concluded that the
proposed policy, if adopted, would be prospective only and would not apply to
applications properly on file before the release of the NPRM. As stated above,
WTCI filed its application prior to the release of the NPRM, but the FCC
dismissed the application without prejudice. Although WTCI filed a petition
for reconsideration of the FCC's decision, there can be no assurance that the
FCC will act favorably on the petition and there can be no assurance that
WTCI's application will not be subject to the outcome of the DISCO II
proceeding.
RECENT FCC ACTIONS
On October 18, 1995, the FCC upheld a decision by its International Bureau
denying a request by Advanced Communications Corporation ("ACC") for an
extension of its construction permit for channels and orbital assignments at
110(degrees) W.L. and 148(degrees) W.L. This was the FCC's first denial of a
request for an extension of a construction permit deadline. The FCC held that
an extension of ACC's permit was not warranted in view of ACC's failure to
achieve any concrete progress toward the actual construction and operation of
its DBS system. Both ACC's appeal of the decision to the U.S. Court of Appeals
for the District of Columbia Circuit and its petition for rehearing en banc
were denied. ACC has also filed a petition for writ of certiorari in the
United States Supreme Court, which is pending.
In a rulemaking proceeding concluded in December 1995, the FCC announced
that it would auction the orbital slots previously held by ACC. In adopting an
auction, the FCC abandoned its previous policy of reassigning DBS channels
through a method of pro rata distribution to other DBS permittees, without
charge. EchoStar and DirecTv appealed the FCC's decision to the U.S. Court of
Appeals for the District of Columbia Circuit. The case was heard on October 1,
1996, and its outcome cannot be predicted. In January 1996, the FCC auctioned
28 channels at 110(degrees) W.L. to MCI for $682.5 million, and 24 channels at
148(degrees) W.L. to EchoStar for $52.3 million.
In the December rulemaking, the FCC also adopted several new service rules
for U.S.-licensed DBS operators. The FCC established a requirement that all
new DBS permittees provide service to Alaska and Hawaii if such service is
technically feasible. The FCC also required that all existing U.S.-licensed
DBS permittees provide service to Alaska and Hawaii from at least one of their
currently assigned orbital positions. Finally, the FCC revised its rules with
respect to the use of DBS systems to provide non-DBS services. The revised
rules are expected to make it easier for DBS permittees to use portions of
their satellite capacity for non-DBS services such as data transfer. Tempo
cannot predict how application of these rules will effect its operations, or
the operations of its competitors.
THE TELECOMMUNICATIONS ACT OF 1996
The Telecommunications Act of 1996 ("1996 Telecom Act") clarifies that the
FCC has exclusive jurisdiction over direct-to-home satellite services, and
that criminal penalties may be imposed for piracy of direct-to-home satellite
services. The 1996 Telecom Act also preempted local (but not state)
governments from imposing taxes or fees on direct-to-home services, including
DBS, and directed the FCC to promulgate regulations prohibiting local
(including state) governments from maintaining zoning regulations that
restrict the use of DBS receive-only dishes in residential areas. The FCC has
adopted rules it believes comply with the statutory requirement regarding
zoning issues. Finally, the 1996 Telecom Act required that multichannel video
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<PAGE>
programming distributors such as DBS operators scramble or block channels
providing indecent or sexually explicit adult programming.
EXPORT REGULATION
Export licensing authorization from either the Department of Commerce or the
Department of State is required for the transport of satellites to certain
foreign countries, including Kazakhstan, the proposed launch site for the
first Company Satellite, and for the exchange of certain information necessary
to prepare the satellites for launch. Although the Company has been advised by
Loral that Loral has received export licensing authorization from the
Department of State with respect to the launch of the first Company Satellite,
there can be no assurance that additional export licensing authorization from
the Department of Commerce will not be required in connection with such
launch. In addition, future launches may require separate export licensing
authorization.
ANTITRUST DECREES
PRIMESTAR Partners and the partners of the Partnership named in the actions
described below are subject to the jurisdiction of the U.S. District Court for
the Southern District of New York to ensure compliance with two antitrust
consent decrees. In United States v. PRIMESTAR Partners, L.P., et al., 93 Civ.
3913 (SDNY, 1993) (the "Federal Decree"), the Partnership and such partners
agreed to refrain from (i) enforcing any provisions of the PRIMESTAR
Partnership Agreement that affect the availability, price, terms or conditions
of sale of programming to any provider of multichannel subscription
television, or (ii) entering into certain other agreements restricting the
availability of programming services. The Federal Decree expires in April
1999. In The States of New York, et al. v. PRIMESTAR Partners, L.P., et al.,
93 Civ. 3068-3907 (SDNY, 1994) (the "State Decree" and, together with the
Federal Decree, the "Decrees"), the Partnership and such partners agreed,
among other things, to provide access to certain related programming services
on reasonable terms to other digital satellite service and MMDS providers, to
make certain changes to PRIMESTAR Partners' management structure and the
PRIMESTAR Partnership Agreement, and to limit the use of exclusive programming
agreements. The State Decree expires in part in October 1997, with the
remainder expiring on or before October 1, 1999. The Company was not named as
a defendant in either of the above actions, but may be subject to certain
provisions of one or both of the Decrees as a successor-in-interest to TCI K-
1, Inc. and United Artists K-1 Investments, Inc., indirect subsidiaries of TCI
that were original partners in PRIMESTAR Partners and named defendants in the
actions. The Company believes that it is currently in compliance with the
Decrees in all material respects and that the Decrees do not currently have a
material adverse effect on the Company or its operations.
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<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The following persons are expected to serve as directors and/or executive
officers of the Company as of the date of the Distribution:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gary S. Howard........ 45 President and Chief Executive Officer; Director
Kenneth G. Carroll.... 41 Senior Vice President and Chief Financial Officer
Lloyd S. Riddle III... 36 Senior Vice President and Chief Operating Officer
Christopher Sophinos.. 44 Senior Vice President
William D. Myers...... 38 Vice President and Treasurer
John C. Malone........ 55 Director
David P. Beddow....... 52 Director
William E. Johnson.... 55 Director
John W. Goddard....... 55 Director
</TABLE>
The following is a five-year employment history for the directors and
executive officers of the Company, including any directorships held in public
companies. It is contemplated that Mr. Howard will terminate his position as
Senior Vice President of TCIC effective on the date of the Distribution.
Gary S. Howard has served as Senior Vice President of TCIC since October
1994 and President of the Company since February 1995. Mr. Howard served as
Vice President of TCI from December 1991 through October 1994 and as Senior
Vice President of United Artists Entertainment Company from June 1989 to
December 1991.
Kenneth G. Carroll has served as Senior Vice President and Chief Financial
Officer of the Company since February 1995. Since December 1994, Mr. Carroll
has served as Vice President of TCI K-1, Inc. and as Vice President of United
Artists K-1 Investments, Inc. From April 1994 through January 1995, Mr.
Carroll served as Vice President of Business Operations and Chief Financial
Officer of Netlink USA, a subsidiary of TCI and a member of the Liberty Media
Group, and from July 1992 to May 1994, Mr. Carroll served as Senior Director
of Finance and Business Operations of Netlink. From 1990 to July 1992, Mr.
Carroll served as Vice President of Finance of Midwest CATV.
Lloyd S. Riddle III has served as Senior Vice President and Chief Operating
Officer of the Company since February 1995. Mr. Riddle served as State Manager
of TCI of New York from February 1993 to February 1995, Area Manager of TCI of
Iowa from January 1992 to February 1993 and General Manager of TCI of St.
Charles, MO from January 1990 to January 1992.
Christopher Sophinos has served as Senior Vice President of the Company
since February 1996. Mr. Sophinos has served as the President of Boats
Unlimited since November 1993 and as a director of Sophinos & Sons, Inc. since
November 1993. Mr. Sophinos served as the President of Midwest CATV, a
division of UNR Industries, Inc., from July 1987 to November 1993.
William D. Myers has served as Vice President and Treasurer of the Company
since September 1996. Mr. Myers served as Vice President of TCI Cable
Management Corporation from November 1994 through August 1996. Mr. Myers
served as Director of Finance of TCI from December 1991 to November 1994 and
Director of Finance for United Artists Entertainment Company from September
1990 to December 1991.
John C. Malone has served as Chief Executive Officer and President of TCI
since January 1994. Dr. Malone served as Chief Executive Officer of TCIC from
March 1992 to October 1994 and as President of TCIC from
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<PAGE>
1973 to October 1994. Dr. Malone has also served as Chairman of the Board and
as a director of Tele-Communications International, Inc. since May 1995. Dr.
Malone is also a director of TCI, TCIC, BET Holdings, Inc., Home Shopping
Network, Inc. and The Bank of New York.
David P. Beddow has served as Senior Vice President of TCITV since February
1995. Mr. Beddow served as Vice President of TCI Technology, Inc. from June
1993 to February 1995 and as Executive Vice President and Chief Operating
Officer of PRIMESTAR Partners from March 1990 to June 1993. Mr. Beddow has
served as a director of UVSG since January 1996.
William E. Johnson served as Chief Executive Officer for Scientific Atlanta,
Inc. from January 1987 to December 1992, at which time he retired. Mr. Johnson
has served as a director of Intelligent Electronic, Inc. since November 1994
and as a director of ATX, Inc. since January 1993. Mr. Johnson was a director
of I.C.T. from 1991 to 1993.
John W. Goddard served as President and Chief Executive Officer of the cable
division of Viacom International, Inc. from 1980 through July 1996, at which
time he retired. Mr. Goddard has served as a director of StarSight Telecast,
Inc. since May 1994.
The directors of the Company will hold office until the next annual meeting
of stockholders of the Company and until their successors are duly elected and
qualified. The executive officers named above will be elected to serve in such
capacities until the next annual meeting of the Company Board, or until their
respective successors have been duly elected and have been qualified, or until
their earlier death, resignation, disqualification or removal from office.
There is no family relationship between any of the directors.
BOARD COMPOSITION
The Company's charter provides for a classified Board of Directors of not
less than three members, with the exact number of directors to be fixed by
resolution of the Company Board. On or before the Distribution Date, the
number of directors on the Company Board will be fixed at five. For purposes
of determining their terms, directors will be divided into three classes. The
Class I director, whose term expires at the 1997 annual stockholders' meeting,
will be Mr. Beddow. The Class II directors, whose terms expire at the 1998
annual stockholders' meeting, will be Messrs. Howard and Johnson. The Class
III directors, whose terms expire at the 1999 annual stockholders' meeting,
will be Dr. Malone and Mr. Goddard. Each director elected at an annual
stockholders' meeting will serve for a term ending on the date of the annual
stockholders' meeting held in the third year following the year of his
election or until his earlier death, resignation or removal.
COMMITTEES OF THE COMPANY BOARD
The Company Board will establish an Audit Committee and a Compensation
Committee.
The Audit Committee of the Board, whose members will be Messrs. Goddard
(Committee Chairman) and Johnson, will consist of only nonemployee directors.
The Audit Committee will meet periodically with management and representatives
of the Company's independent auditors. The Audit Committee will review the
scope and approach of external audit activities and the results of such audits
and will be responsible for making the annual recommendation to the Company
Board of the firm of independent accountants to be retained by the Company to
perform the annual audit.
The Compensation Committee, whose members will be Messrs. Johnson (Committee
Chairman) and Goddard, will consist of only nonemployee directors. The
Compensation Committee will be responsible for recommending the salaries and
compensation programs for executive officers to the Company Board. This
committee will also be responsible for administering the Company's stock
incentive plan and certain other benefit programs. None of the members of the
Compensation Committee will be entitled to participate in any of the Company's
employee benefit plans administered by the Compensation Committee.
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<PAGE>
The Company Board may from time to time establish certain other committees
of the Company Board and may fill any vacancies on any committee of the
Company Board as it deems advisable.
COMPENSATION OF DIRECTORS
Members of the Company Board who are also full-time employees of the Company
or TCI, or any of their respective subsidiaries, will not receive any
additional compensation for their services as directors. Directors who are not
full-time employees of the Company or TCI, or any of their respective
subsidiaries, will receive a retainer of $10,000 per year. All members of the
Company Board will also be reimbursed for expenses incurred to attend any
meetings of the Company Board or any committee thereof.
See also "Arrangements Between TCI and the Company After the Distribution--
Other Arrangements."
COMPENSATION OF EXECUTIVE OFFICERS
The following tables set forth information relating to compensation from the
Company (or from TCI or any other subsidiary of TCI) to the Company's Chief
Executive Officer and each of the next most highly compensated executive
officers of the Company other than the Company's Chief Executive Officer, for
services rendered in all capacities to TCI.
The following table is a summary of all forms of compensation paid to the
officers named therein for such services for the fiscal year ended December
31, 1995 (total of four persons).
SUMMARY COMPENSATION TABLE FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- --------------------------
RESTRICTED
NAME AND PRINCIPAL OTHER ANNUAL STOCK SECURITIES ALL OTHER
POSITION COMPENSATION AWARD UNDERLYING COMPENSATION
WITH THE COMPANY SALARY ($) BONUS ($) ($)(1) ($)(2) OPTIONS/SARS(3) ($)(4)
------------------ ---------- --------- ------------ ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gary S. Howard
(President and Chief
Executive Officer).... $262,500 $23,210(5) $ 3,415 $309,375 150,000 $15,000
Lloyd S. Riddle III
(Senior Vice President
and Chief Operating
Officer).............. $123,078 $34,478 $ 1,557 -- 17,500 $13,439
Kenneth G. Carroll
(Senior Vice President
and Chief Financial
Officer).............. $ 98,845 $27,199 $ 861 -- 17,500 $ 3,668
William D. Myers (Vice
President and
Treasurer)............ $108,130 -- $ 2,425 -- 10,000 $ 8,839
</TABLE>
- --------
(1) Consists of amounts reimbursed during the year for the payment of taxes.
(2) Pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan (the
"TCI 1994 Plan"), on December 13, 1995, Mr. Howard was granted 15,000
restricted shares of Series A TCI Group Common Stock. Such restricted
shares vest as to 50% of such shares on December 13, 1999 and as to the
remaining 50% on December 13, 2000. The value of such restricted shares at
the end of 1995 was $298,125. TCI has not paid cash dividends on the
Series A TCI Group Common Stock and does not anticipate declaring and
paying cash dividends on the Series A TCI Group Common Stock at any time
in the foreseeable future.
(3) For additional information regarding this award, see "--Option and SAR
Grants of Series A TCI Group Common Stock to Company Executives in Last
Fiscal Year," below.
(4) All amounts shown in this column represent contributions to the TCI
Employee Stock Purchase Plan ("ESPP"). All named executive officers of the
Company for whom contributions were made in 1995 are fully vested except
for Kenneth G. Carroll who is 45% vested in TCI's contribution. The
accounts in the ESPP of all employees of the Company will become vested in
full as of the effective time of the
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<PAGE>
Distribution. Directors who are not employees of TCI are ineligible to
participate in the ESPP. The ESPP, a defined contribution plan, enables
participating employees to acquire a proprietary interest in TCI and
benefits upon retirement. Under the terms of the ESPP, employees are
eligible for participation after one year of service. The ESPP's normal
retirement age is 65 years. Participants may contribute up to 10% of their
compensation and TCI (by annual resolution of the TCI Board) may contribute
up to a matching 100% of the participants' contributions. The ESPP includes
a salary deferral feature in respect of employee contributions. Forfeitures
(due to participants' withdrawal prior to full vesting) are used to reduce
TCI's otherwise determined contributions. Generally, participants acquire a
vested right in TCI contributions as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE VESTING PERCENTAGE
---------------- ------------------
<S> <C>
Less than 1............... 0
1-2..................... 20
2-3..................... 30
3-4..................... 45
4-5..................... 60
5-6..................... 80
6 or more................. 100
</TABLE>
Participant contributions are fully vested. Although TCI has not expressed
an intent to terminate the ESPP, it may do so at any time. The ESPP
provides for full immediate vesting of all participants' rights upon
termination.
(5) This amount reflects the amortization of obligations under an employment
contract between Mr. Howard and a prior employer, which were assumed by
TCI in connection with the acquisition of such prior employer.
OPTION AND SAR GRANTS OF SERIES A TCI GROUP COMMON STOCK TO COMPANY EXECUTIVES
IN LAST FISCAL YEAR
The following table discloses information regarding stock options granted in
tandem with stock appreciation rights to the executive officers named in the
above Summary Compensation Table in respect of shares of Series A TCI Group
Common Stock under the Tele-Communications, Inc. 1995 Stock Incentive Plan
(the "TCI 1995 Plan").
OPTION AND SAR GRANTS TO PURCHASE SERIES A TCI GROUP COMMON STOCK IN THE LAST
FISCAL YEAR
<TABLE>
<CAPTION>
NO. OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR MARKET PRICE
OPTIONS/SARS EMPLOYEES IN BASE PRICE ON GRANT DATE GRANT DATE
NAME GRANTED 1995 ($/SH) ($/SH) EXPIRATION DATE PRESENT VALUE
---- ------------ ------------ ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary S. Howard.......... 150,000 (1)(5) $17.00 $20.625(3) August 4, 2005 $2,120,070(4)
Lloyd S. Riddle III..... 17,500 (2)(5) $17.00 $20.625(3) August 4, 2005 $ 247,342(4)
Kenneth G. Carroll...... 17,500 (2)(5) $17.00 $20.625(3) August 4, 2005 $ 247,342(4)
William D. Myers........ 10,000 (2)(5) $17.00 $20.625(3) August 4, 2005 $ 141,338(4)
</TABLE>
- --------
(1) Mr. Howard's grant, pursuant to the TCI 1995 Plan, of options in tandem
with stock appreciation rights represents 5.4% of the total options
granted to purchase Series A TCI Group Common Stock pursuant to the TCI
1995 Plan and, together with the options granted to purchase Series A TCI
Group Common Stock pursuant to the TCI 1994 Plan and the Tele-
Communications, Inc. 1996 Incentive Plan (the "TCI 1996 Plan"), represents
2.0% of all options granted in 1995 to purchase Series A TCI Group Common
Stock.
(2) Mr. Riddle's, Mr. Carroll's and Mr. Myers' grants, pursuant to the TCI
1995 Plan, of options in tandem with stock appreciation rights represent
less than 1% of the total options granted to purchase Series A TCI Group
Common Stock pursuant to the TCI 1995 Plan and, together with the options
granted to purchase Series A TCI Group Common Stock pursuant to the TCI
1994 Plan and the TCI 1996 Plan, represent less than 1% of all options
granted in 1995 to purchase Series A TCI Group Common Stock.
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<PAGE>
(3) Represents the closing market price per share of Series A TCI Group Common
Stock on December 13, 1995.
(4) The values shown are based on the Black-Scholes model and are stated in
current annualized dollars on a present value basis. The key assumptions
used in the model for purposes of this calculation include the following:
(a) a 5.65% discount rate; (b) a volatility factor based upon the
historical trading pattern of Series A TCI Group Common Stock; (c) the 10-
year option term; and (d) the closing price of Series A TCI Group Common
Stock on February 8, 1996. The actual value an executive may realize will
depend upon the extent to which the stock price exceeds the exercise price
on the date the option is exercised. Accordingly, the value, if any,
realized by an executive will not necessarily be the value determined by
the model.
(5) On December 13, 1995, pursuant to the TCI 1994 Plan, certain executive
officers of TCI were granted an aggregate of 2,650,000 options in tandem
with stock appreciation rights to acquire shares of Series A TCI Group
Common Stock. On December 13, 1995, pursuant to the TCI 1995 Plan, certain
key employees of TCI were granted an aggregate of 2,757,500 options in
tandem with stock appreciation rights to acquire shares of Series A TCI
Group Common Stock. On December 13, 1995, pursuant to the TCI 1996 Plan,
certain executive officers of TCI were granted an aggregate of 2,000,000
options in tandem with stock appreciation rights to acquire shares of
Series A TCI Group Common Stock. Each such grant of options with tandem
stock appreciation rights vests evenly over five years with such vesting
period beginning August 4, 1995, first becomes exercisable beginning on
August 4, 1996 and expires on August 4, 2005.
The following table provides, for the executives named in the Summary
Compensation Table, information on the exercise during the year ended December
31, 1995 of TCI Options granted in tandem with TCI SARs, the number of shares
of Series A TCI Group Common Stock represented by unexercised TCI Options and
TCI SARs owned by them at December 31, 1995, and the value of those TCI
Options and TCI SARs as of the same date.
AGGREGATED TCI OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-
END TCI OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-
UNEXERCISED THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
DECEMBER 31, AT DECEMBER 31,
VALUE 1995 (#) 1995 ($)
SHARES ACQUIRED REALIZED EXERCISABLE / EXERCISABLE /
NAME ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
---- --------------- -------- --------------- ---------------
<S> <C> <C> <C> <C>
Gary S. Howard
Exercisable......... 9,714 $75,046 95,000 $525,625
Unexercisable....... -- -- 205,000 $811,875
Lloyd S. Riddle III
Exercisable......... -- -- 4,300 $ 12,763
Unexercisable....... -- -- 17,200 $ 51,050
Kenneth Carroll
Exercisable......... -- -- 4,300 $ 12,763
Unexercisable....... -- -- 17,200 $ 51,050
William D. Myers
Exercisable......... -- -- 3,800 $ 11,825
Unexercisable....... -- -- 15,200 $ 47,300
</TABLE>
Additionally, on the Distribution Date, Mr. Howard will be granted an option
to purchase shares of Series A Common Stock representing 1.0% of the number of
shares of Company Common Stock issued and outstanding on the Distribution
Date, determined immediately after giving effect to the Distribution, but
before giving effect to the exercise of such option or the other options to be
evidenced by the Stock Option Agreements. The
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<PAGE>
aggregate exercise price for such option is equal to 1.0% of TCI's Net
Investment (as previously defined) as of the first to occur of the
Distribution Date and the date on which such option first becomes exercisable,
but excluding any portion of TCI's Net Investment that as of such date is
represented by a promissory note or other evidence of indebtedness from the
Company to TCI. Such option will be granted on the Distribution Date, will
vest in 20% cumulative increments on each of the first five anniversaries of
February 1, 1996 and will be exercisable for up to ten years following
February 1, 1996. The Company has agreed to bear all obligations under such
option, effective as of the Distribution Date. See "Arrangements Between TCI
and the Company After the Distribution--Other Arrangements."
THE TCI SATELLITE ENTERTAINMENT, INC. 1996 STOCK INCENTIVE PLAN
General. It is expected that, on or before the Distribution Date, the
Company Board will adopt, and TCI, as the sole stockholder of the Company
prior to the Distribution, will approve, the TCI Satellite Entertainment, Inc.
1996 Stock Incentive Plan (the "1996 Plan"). The 1996 Plan will provide for
awards to be made in respect of a maximum of 3,200,000 shares of Series A
Common Stock (subject to certain anti-dilution adjustments). Awards may be
made as grants of stock options ("Options"), stock appreciation rights
("SARs"), restricted shares ("Restricted Shares"), Stock Units (as defined
below), performance awards ("Performance Awards") or any combination thereof
(collectively, "Awards"). Awards may be made to employees and to consultants
and advisors to the Company who are not employees. Shares of Series A Common
Stock that are subject to Awards that expire, terminate or are annulled for
any reason without having been exercised (or deemed exercised, by virtue of
the exercise of a related SAR), or are forfeited prior to becoming vested,
will return to the pool of such shares available for grant under the 1996
Plan.
The 1996 Plan will be administered by the Compensation Committee of the
Company Board, or such other committee as the Company Board may in the future
appoint, which shall comprise at least two persons (the "Committee"). Each
member of the Committee will be a member of the Company Board who is not a
current employee of the Company and is not otherwise disqualified from being
(A) a "non-employee director" with respect to the Company for purposes of Rule
16b-3 under the Exchange Act (or any successor rule) or (B) an "outside
director" with respect to the Company for purposes of Section 162(m) of the
Code (or any successor statute) and the rules and regulations of the Treasury
Department promulgated thereunder.
The Committee will have broad discretion in administering the 1996 Plan, and
is authorized, subject only to the express provisions of the 1996 Plan, to
determine the eligible persons to whom Awards may be made, to determine the
terms and conditions (which need not be identical) of each Award (including
the timing of the grant, the type of Award granted, the pricing and the amount
of the Award and terms related to vesting, exercisability, forfeiture and
termination), and to interpret the provisions of the 1996 Plan and each
agreement relating to Awards granted under the 1996 Plan. The determinations
of the Committee are final and binding upon all participants.
Stock Options. Options granted pursuant to the 1996 Plan may be either
incentive stock options ("Incentive Options") within the meaning of Section
422 of the Code, or nonqualified stock options ("Nonqualified Options"), which
do not qualify under Section 422. The Committee is authorized to determine
whether an Option is an Incentive Option or a Nonqualified Option.
The exercise price of all Options granted under the 1996 Plan will be fixed
by the Committee, and may be more than, less than or equal to the fair market
value of the Series A Common Stock on the date the Option is granted. However,
the Company does not have any current intention to grant Options with an
exercise price less than the fair market value of the Series A Common Stock on
the date of grant. Except as otherwise provided in the 1996 Plan regarding
acceleration of Awards, no participant may be granted Options covering more
than 1,000,000 shares of Series A Common Stock in the calendar year ending
December 31, 1996, or Options covering more than 500,000 shares of Series A
Common Stock in any one subsequent calendar year (in each case as adjusted for
stock splits, etc.)
Subject to the provisions of the 1996 Plan relating to death, retirement and
termination of employment, the term of each Option will be fixed by the
Committee at the time of grant. Options may be exercised in whole or in part
at any time or only after a period of time or in installments, as determined
by the Committee at the time of grant, and the exercisability of Options may
be accelerated by the Committee.
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<PAGE>
An Option shall be exercised by written notice to the Committee upon the
terms set forth in the agreement relating thereto and in accordance with such
other procedures as the Committee may establish.
The method of payment of the exercise price of an Option will be determined
by the Committee and may consist of cash, a check, a promissory note, the
surrender of already owned shares of Series A Common Stock or Series B Common
Stock, the withholding of shares of Series A Common Stock issuable upon
exercise of such Option, delivery of a properly executed exercise notice and
irrevocable instructions to a broker to deliver promptly to the Company the
amount of sale or loan proceeds required to pay the exercise price, any
combination of the foregoing methods of payment or such other consideration
and method of payment as may be permitted for the issuance of shares under
Delaware law, subject, in the case of any permitted method of payment other
than cash, to such conditions as the Committee deems appropriate. By way of
example, if a holder is permitted to elect to pay such exercise price by the
withholding of shares of Series A Common Stock, the Committee may reserve the
discretion to approve or disapprove such election.
Stock Appreciation Rights. An SAR may be granted under the 1996 Plan to the
holder of an Option (a "related Option") with respect to all or a portion of
the shares of Series A Common Stock subject to the related Option (a "Tandem
SAR") or may be granted separately to an eligible participant (a "Free
Standing SAR"). A Tandem SAR may be granted either concurrently with the grant
of the related Option or, if the related Option is a Nonqualified Option, at
any time thereafter and prior to the complete exercise, termination,
expiration or cancellation of the related Option. A Tandem SAR will be
exercisable only at the time and to the extent that the related Option is
exercisable and may be subject to such additional limitations on
exercisability as the Committee may determine. Upon exercise of a Tandem SAR,
the related Option will be deemed to have been exercised to the extent of the
number of shares of Series A Common Stock with respect to which such Tandem
SAR is exercised. Conversely, upon the exercise or termination of the related
Option, the Tandem SAR will be canceled automatically to the extent of the
number of shares of Series A Common Stock with respect to which the related
Option was so exercised or terminated. Free Standing SARs will be exercisable
at the time, to the extent and upon the terms and conditions determined by the
Committee and set forth in the agreement relating to the Award. Except a
provided with respect to acceleration, no participant may be granted SARs
covering more than 1,000,000 shares of Series A Common Stock in the calendar
year ending December 31, 1996, or SARs covering more than 500,000 shares of
Series A Common Stock in any one subsequent calendar year (in each case and
adjusted for stock splits, etc.)
The base price of a Tandem SAR will be the same as the exercise price of the
related Option unless the Committee provides for a higher base price. The base
price of a Free Standing SAR will not be less than the fair market value of
the Series A Common Stock on the date of grant of the Free Standing SAR. Upon
exercise of a SAR, the holder will be entitled to receive from the Company,
for each share of Series A Common Stock with respect to which the SAR is
exercised, an amount equal to the excess of the fair market value of a share
of Series A Common Stock on the date of exercise over the base price per share
of such SAR. Such amount shall be paid in cash, shares of Series A Common
Stock (valued at their fair market value on the date of exercise of the SAR)
or a combination thereof as specified in the agreement relating to the Award.
Unless the Committee shall otherwise determine, to the extent a Free Standing
SAR is exercisable, it will be exercised automatically for a cash settlement
on its expiration date.
The agreement relating to an Award of SARs may provide for a limit on the
amount payable to a holder upon exercise of SARs at any time or in the
aggregate, for a limit on the number of SARs that may be exercised by the
holder in whole or in part for cash during any specified period, for a limit
on the time periods during which a holder may exercise SARs and for such other
limits on the rights of the holder and other terms and conditions as the
Committee may determine.
Restricted Shares. At the time of any Award of Restricted Shares, the
Committee will designate a period of time which must elapse (the "Restriction
Period") and may impose such other restrictions, terms and conditions that
must be fulfilled, before the Restricted Shares will become vested. The
Committee may determine
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<PAGE>
that (a) Restricted Shares will be issued at the beginning of the Restriction
Period, in which case, such shares will constitute issued and outstanding
shares of Series A Common Stock for all corporate purposes or (b) Restricted
Shares will not be issued until the end of the Restriction Period, in which
case the participant receiving the Award will have none of the rights of a
stockholder with respect to the shares of Series A Common Stock covered by
such Award until such shares shall have been issued to such participant at the
end of the Restriction Period. The participant will have the right to vote
Restricted Shares issued at the beginning of the Restriction Period and to
receive such dividends and other distributions as the Committee may, in its
sole discretion, designate that are paid or distributed on such Restricted
Shares, and generally to exercise all other rights as a holder of Series A
Common Stock, except that, until the end of the Restriction Period: (i) such
participant will not be entitled to take possession of the stock certificates
representing the Restricted Shares; (ii) such participant may not sell,
transfer or otherwise dispose of the Restricted Shares; and (iii) other than
such dividends and other distributions as the Committee may designate, the
Company will retain custody of all dividends and distributions made or
declared with respect to the Restricted Shares ("Retained Distributions") and
such Retained Distributions shall not bear interest or be segregated in a
separate account. In the case of Restricted Shares issued at the end of the
Restriction Period, the participant will be entitled to receive, to the extent
specified by the Committee only, cash or property corresponding to all
dividends and other distributions (or the economic equivalent thereof) that
would have been paid, made or declared on such Restricted Shares had such
shares been issued at the beginning of the Restriction Period (collectively,
"Dividend Equivalents"), and such Dividend Equivalents will be paid as
specified by the Committee in the applicable Award agreement. A breach of any
restrictions, terms or conditions established by the Committee with respect to
any award of Restricted Shares will cause a forfeiture of such Restricted
Shares and any Retained Distributions (including any unpaid Dividend
Equivalents) with respect thereto. The 1996 Plan also provides that the
Committee may authorize awards of cash to a holder of Restricted Shares,
payable at any time after the Restricted Shares become vested.
Upon expiration of the applicable Restriction Period and the satisfaction of
any other applicable conditions, all or part of the Restricted Shares and any
Retained Distributions thereon (including any unpaid Dividend Equivalents)
will become vested and all or part of any cash amount awarded will become
payable. Any Restricted Shares and Retained Distributions thereon (including
any unpaid Dividend Equivalents) which do not so vest will be forfeited.
Stock Units. The 1996 Plan also authorizes the Committee to grant to
eligible participants, either alone or in addition to Options, SARs and
Restricted Shares, awards of Series A Common Stock and other awards that are
valued in whole or in part by reference to, or are otherwise based on, the
value of the Series A Common Stock ("Stock Units"). The Committee will
determine all terms and conditions of such Awards, including any restrictions
(including restrictions on transfer), deferral periods, or performance
requirements. The provisions of any Award of Stock Units need not be the same
with respect to each recipient and are subject to such rules as the Committee
may establish at the time of grant.
Performance Awards. Performance Awards consist of grants made to an eligible
person subject to the attainment of one or more performance goals. A
Performance Award will be paid, vested or otherwise deliverable solely upon
the attainment of one or more pre-established, objective performance goals
established by the Committee prior to the earlier of (i) 90 days after the
commencement of the period of service to which the performance goals relate,
and (ii) the passage of 25% of the period of service, and in any event while
the outcome is substantially uncertain. A performance goal may be based upon
one or more business criteria that apply to the eligible person, one or more
business units of the Company or the Company as a whole, and may include any
of the following: revenue, net income, cash flow (as defined for such purpose
by the Committee), stock price, market share, earnings per share, return on
equity, return on assets or decrease in costs. Subject to the foregoing, the
terms, conditions and limitations applicable to any Performance Award will be
determined by the Compensation Committee.
Any Performance Awards granted under the 1996 Plan will be limited so that
no individual may be granted Performance Awards consisting of cash or in any
other form permitted under the 1996 Plan (other than any Awards consisting of
Options or SARs or otherwise consisting of shares of Common Stock or units
denominated in such shares, or, in either case, additional cash amounts
related to such an Award) in respect of any one-year period having a value
determined on the date of grant in excess of $10,000,000.
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<PAGE>
Effect of Termination of Employment. Under the terms of the 1996 Plan, if
the employment of the holder of an Award (which for this purpose includes the
engagement of the holder of an Award as a nonemployee consultant or advisor)
terminates by reason of death or total disability, then, unless the agreement
relating to such Award provides otherwise, (a) all outstanding Options and
SARs granted in such Award will become immediately exercisable in full in
respect of the aggregate number of shares covered thereby, (b) the Restriction
Period for all Restricted Shares granted in such Award will be deemed to have
expired and all such Restricted Shares, any related Retained Distributions and
any unpaid Dividend Equivalents will become vested and any cash amounts
payable pursuant to the related agreement will be adjusted in such manner as
may be provided in such agreement, and (c) all Stock Units granted in such
Award will become vested in full.
Under the terms of the 1996 Plan, if the employment of the holder of an
Award is terminated during the Restriction Period with respect to any
Restricted Shares, or prior to the complete exercise of any Option or SAR or
the vesting or complete exercise of any Stock Units, granted in such Award,
then such Options, SARs and Stock Units will thereafter be exercisable, and
the holder's rights to any such unvested Restricted Shares, Retained
Distributions, unpaid Dividend Equivalents and cash amounts and any such
unvested Stock Units will thereafter vest, only to the extent provided by the
Committee in the agreement relating to such Award, except that (a) if the
holder's employment terminates by reason of death or total disability then any
Option or SAR granted in the Award will remain exercisable for a period of at
least one year after such termination (but not later than the scheduled
expiration of such Option or SAR), (b) no Option or SAR may be exercised after
the scheduled expiration date thereof, and (c) if the holder's employment is
terminated for cause (as defined) then (i) such participant's rights to all
Restricted Shares, Retained Distributions, unpaid Dividend Equivalents and any
cash amounts covered by such Award will be forfeited immediately, (ii) all
Options and SARs and all unvested or unexercised Stock Units granted in such
Award will immediately terminate and (iii) such participant's interest in all
unvested Performance Awards shall be forfeited immediately.
Additional Provisions. Unless otherwise required by the Committee in the
agreement relating to an Award, each Award will vest and become exercisable in
full upon the occurrence of any of the following change in control
transactions: (a) the Company Board (or stockholders, if Company Board
approval is not required by law) approves any of the following transactions
(each an "Approved Transaction"): (i) a merger, consolidation or binding share
exchange to which the Company is a party (x) pursuant to which shares of
Series A Common Stock would be converted into or exchanged for cash,
securities or other property (other than a transaction in which the common
stockholders of the Company prior to such transaction have the same
proportionate ownership of the common stock of, and voting power with respect
to, the surviving corporation immediately after such transaction) or (y) as a
result of which the persons who are common stockholders of the Company prior
to such transaction would have less than a majority of the combined voting
power of the outstanding capital stock of the Company immediately following
such transaction; (ii) the sale of substantially all of the assets of the
Company; or (iii) the liquidation or dissolution of the Company; (b) any
person or other entity (other than the Company, any subsidiary, any employee
benefit plan sponsored by the Company or any subsidiary or any Controlling
Person (as defined)) purchases any common stock of the Company pursuant to a
tender or exchange offer, without the prior consent of the Company's Board, or
any person or other entity (other than the Company, any subsidiary, any
employee benefit plan sponsored by the Company or any subsidiary or any
Controlling Person) becomes the beneficial owner of securities of the Company
representing 20% or more of the combined voting power of the Company's
outstanding securities, other than in a transaction (or series of related
transactions) approved by the Company's Board; or (c) during any two-year
period, individuals who at the beginning of such period constitute the entire
Board of the Company cease to constitute a majority of the Board, unless the
election, or nomination for election, of each new director is approved by at
least two-thirds of the directors then still in office who were directors at
the beginning of the period. "Controlling Person" is defined in the 1996 Plan
to mean each of (1) the Chairman of the Board, the President and each of the
directors of the Company as of the effective date of the 1996 Plan, (2) John
C. Malone, (3) Bob Magness, (4) the respective family members, estates and
heirs of each of the persons referred to in clauses (1) through (3) and any
trust or other investment vehicle for the primary benefit of any of such
persons or their respective family members or heirs and (5) Kearns-Tribune
Corporation. Options, SARs, or, if applicable, Stock Units not theretofore
exercised will terminate upon consummation of an Approved Transaction. The
Committee will have the discretion, unless otherwise provided
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<PAGE>
in the agreement relating to a particular Award, to determine that any or all
outstanding Awards of any or all types granted pursuant to the 1996 Plan will
not vest or become exercisable on an accelerated basis in connection with an
Approved Transaction or will not terminate if not exercised prior to
consummation of the Approved Transaction, if action that, in the opinion of the
Committee, is equitable and appropriate is taken by the Company Board or by the
surviving or acquiring corporation, as the case may be, to assume such Award or
substitute a new award therefor that is, as nearly as may be practicable,
equivalent to the old Award.
The Committee may require in the agreement relating to an Award that if the
holder acquires any shares of Series A Common Stock through the exercise of
Options or SARs or through the vesting of Restricted Shares or Stock Units
granted in the Award, then prior to selling or otherwise transferring any such
shares to a third party, such holder must offer to sell such shares to the
Company, at their fair market value, pursuant to a right of first refusal.
No awards may be granted under the 1996 Plan on or after the tenth
anniversary of its effective date. The Company Board or the Committee may
terminate or amend the 1996 Plan at any time. Without stockholder approval, no
amendment to the 1996 Plan shall increase the number of shares of Series A
Common Stock subject to the 1996 Plan, change the class of persons eligible to
receive Awards under the 1996 Plan, or otherwise materially increase the
benefits accruing to participants under the 1996 Plan. Subject to the specific
terms of the 1996 Plan, the Committee may accelerate any Award or waive any
conditions or restrictions pertaining to such Award at any time.
EMPLOYEE STOCK PURCHASE PLAN
The Company will establish an employee benefit plan known as the Qualified
Employee Stock Purchase Plan (the "Employee Plan"). The Employee Plan is
intended to be a qualified employee plan under Sections 401(a) and 401(k) of
the Code. The basic terms of the Employee Plan are as follows: An employee must
complete one year of service and be at least 18 years of age to participate in
the Employee Plan. Upon commencing participation, the participant may elect to
make pre-tax contributions, after-tax contributions or both to the Employee
Plan (the "Participant Contributions"). All Participant Contributions are made
by payroll deduction and all Participant Contributions may not exceed 10% of
the participant's wages from the Company. Only the first $155,000 (as adjusted
in 1997 and thereafter for cost of living increases) of any participant's
compensation is taken into account for all purposes under the Employee Plan, as
required by law. Pre-tax Participant Contributions are not subject to income
tax when contributed to the Employee Plan, but those pre-tax Participant
Contributions will be subject to FICA taxes when contributed to the Employee
Plan. Those pre-tax Participant Contributions (and earnings) will be taxed to
the participant when the participant receives a distribution from the Employee
Plan. Pre-tax Participant Contributions are limited to $9,500 for each year (as
adjusted for cost of living increases). After-tax Participant Contributions are
subject to income taxes and FICA taxes when contributed to the Employee Plan,
but earnings on those contributions will not be taxed to the participant until
the participant receives a distribution from the Employee Plan. Participant
Contributions always are 100% vested. All Participant Contributions are
invested in the Company Common Stock.
The Company, in its discretion, may make Company matching contributions to
the Employee Plan for each participant who makes Participant Contributions. The
Company matching contribution may be an amount up to 100% of the Participant
Contributions to the Employee Plan. All Company contributions to the Employee
Plan are invested in the Company Common Stock. Company contributions to the
Employee Plan become vested according to a vesting schedule that provides for
20% vesting after one year of service, 30% vesting after two years of service,
45% vesting after three years of service, 60% vesting after four years of
service, 80% vesting after five years of service and 100% vesting after six
years of service. Service with TCI or any of its subsidiaries prior to the
Distribution Date will be counted toward such vesting schedule. A year of
service will be credited if the participant completes 1,000 hours of service
during the Plan Year. In addition, a participant will be 100% vested in his
Company contributions upon attaining normal retirement age (age 65), upon
becoming totally disabled, or upon the participant's death while employed with
the Company. Company contributions to the Employee Plan (and earnings on those
contributions) on behalf of a participant are not taxable to the participant
until those amounts are distributed from the Employee Plan. The Company
receives a deduction for the amounts it contributes to the Employee Plan.
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<PAGE>
A participant can withdraw his Participant Contributions and Company
contributions while he remains employed by the Company only in the following
limited circumstances: Upon attaining age 59 1/2, and if the participant is
100% vested in his Company contributions, the participant may request one
withdrawal of all or any portion of his Company contributions account
(including earnings on such contributions) and his pre-tax Participant
Contributions account (including earnings on such contributions). A
Participant may withdraw any portion of his after-tax Participant
Contributions at any time but, if the Participant is not yet 59 1/2, a
withdrawal of after-tax Participant Contributions will result in the
Participant not being eligible to make any Participant Contributions to the
Employee Plan for a period of six months from the date of the withdrawal. Upon
experiencing a financial hardship, a Participant may request a withdrawal of
his pre-tax Participant Contributions (but not the earnings on such
contributions) in an amount necessary to meet the financial need, subject to
certain limitations.
Upon terminating employment with the Company, the participant may receive a
distribution of his entire vested account in the Employee Plan. Distributions
will be made in whole shares of the Company Common Stock, which may be rolled
over to an IRA or other qualified plan upon the election of the participant.
The shares of stock that are attributable to after-tax Participant
Contributions will be distributed to the participant tax-free because that
stock is purchased with after-tax dollars. Subsequent sales of the stock by
the participant may result in taxation to the participant. The appreciation on
all stock generally is not taxed until the shares are sold by the participant
if the participant receives the stock in a lump sum. A 10% federal penalty tax
may be imposed on certain early distributions from the Employee Plan. The tax
is 10% of the taxable amount of the distribution.
STOCK OWNERSHIP OF MANAGEMENT
TCI currently owns all the issued and outstanding shares of capital stock of
the Company. The following table lists the number of shares of Company Common
Stock that are expected to be owned beneficially by each director, each of the
executive officers named in the above Summary Compensation Table, and all
directors and executive officers as a group immediately following the
Distribution, based on their respective holdings of TCI Group Common Stock as
of April 30, 1996, according to data furnished by the persons named. The
number of shares and percentage amounts have been calculated in each case
assuming, solely for purposes of this disclosure, (x) that the number of
shares of TCI Group Common Stock beneficially owned by such directors and
executive officers on the Record Date, and the total number of shares of TCI
Group Common Stock outstanding on the Record Date, are in each case identical
to such amounts on April 30, 1996, and (y) that the Company Common Stock will
be distributed to TCI Group Stockholders on a 1:10 ratio. Shares issuable upon
exercise of options and upon vesting of restricted shares are deemed to be
outstanding for the purpose of computing the percentage ownership and overall
voting power of persons expected to beneficially own such securities, but have
not been deemed to be outstanding for the purpose of computing the percentage
ownership or overall voting power expected of any other person. Voting power
in the table is computed with respect to a general election of directors. The
number of shares in the table is based on amounts which include interests of
the named directors or executive officers or members of the group of directors
and executive officers in shares held by the trustee of TCI's ESPP and shares
held by the trustee of the United Artist Entertainment Employee Stock
Ownership Plan for their respective accounts. So far as is known to the
Company, the persons indicated below will have sole voting and investment
power with respect to the shares indicated as expected to be owned by them
except for the shares held by the trustee of TCI's ESPP for the benefit of
such person, which shares are voted at the discretion of the trustee. The
following table does not reflect the options to be granted to Gary S. Howard
and David P. Beddow on the Distribution Date pursuant to the Stock Option
Agreements. Mr. Howard's option will entitle him to purchase shares of Series
A Common Stock equal to 1.0%, and Mr. Beddow's option will entitle him to
purchase shares of Series A Common Stock equal to 0.5%, of the number of
shares of Company Common Stock outstanding following the Distribution Date, in
each case without giving effect to the exercise of any of the options to be
evidenced by the Stock Option Agreements. See "Arrangements Between TCI and
the Company After the Distribution--Other Arrangements."
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED PERCENT OF CLASS(1)
--------------------------- --------------------
NAME SERIES A SERIES B SERIES A SERIES B VOTING POWER(1)
---- -------- --------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Directors:
Gary S. Howard........ 34,852(2) -- * -- *
John C. Malone........ 217,203(3) 2,533,208(5) * 29.9% 17.8%
David P. Beddow....... 32,445(4) -- * -- *
William E. Johnson.... 1,900 10 * * *
John W. Goddard....... 1,807(6)(7) 3,525(7) * * *
Other Named Executive
Officers:
Kenneth G. Carroll.... 2,303(8) -- * -- *
Lloyd S. Riddle III... 2,674(8) -- * -- *
William D. Myers...... 2,359(9) -- * -- *
All directors and
executive officers as a 295,543(2)(3)(4) 2,536,745(5)(7) * 29.9% 17.9%
group (nine persons)... (6)(7)(8)
(9)
</TABLE>
- --------
* Less than one percent.
(1) Assuming 58,336,191 shares of Series A Common Stock and 8,468,163 shares
of Series B Common Stock outstanding immediately following the
Distribution, based on 583,361,905 shares of Series A TCI Group Common
Stock and 84,681,629 shares of Series B TCI Group Common Stock outstanding
on April 30, 1996.
(2) Assumes the receipt of Add-On Company Options and Add-On Company SARs in
respect of the following TCI Options and TCI SARs, respectively, and the
exercise in full of all such Add-On Company Options on the Distribution
Date, whether or not then exercisable or in-the-money: (i) stock options
granted in tandem with stock appreciation rights in November of 1992 to
acquire 50,000 shares of Series A TCI Group Common Stock, of which options
to acquire 30,000 shares are currently exercisable; (ii) stock options in
tandem with stock appreciation rights granted in November of 1993 to
acquire 50,000 shares of Series A TCI Group Common Stock, of which options
to acquire 25,000 shares are currently exercisable; (iii) stock options in
tandem with stock appreciation rights granted in November of 1994 to
acquire 50,000 shares of Series A TCI Group Common Stock, of which options
to acquire 10,000 shares are currently exercisable; and (iv) stock options
granted in tandem with stock appreciation rights in December of 1995 to
purchase 150,000 shares of Series A TCI Group Common Stock, of which
options to acquire 30,000 shares are currently exercisable. Additionally
assumes that shares of Series A Common Stock to be issued in the
Distribution in respect of 15,000 restricted shares of Series A TCI Group
Common Stock are issued to Mr. Howard. None of the restricted shares is
currently vested.
(3) Assumes the receipt of Add-On Company Options and Add-On Company SARs in
respect of the following TCI Options and TCI SARs, respectively, and the
exercise in full of all such Add-On Company Options on the Distribution
Date, whether or not then exercisable or in-the-money: (i) stock options
granted in tandem with stock appreciation rights in November of 1992 to
acquire 1,000,000 shares of Series A TCI Group Common Stock, of which
options to acquire 600,000 shares are currently exercisable; and (ii)
stock options granted in tandem with stock appreciation rights in December
of 1995 to acquire 1,000,000 shares of Series A TCI Group Common Stock, of
which options to purchase 200,000 shares are currently exercisable.
(4) Assumes the receipt of Add-On Company Options and Add-On Company SARs in
respect of the following TCI Options and TCI SARs, respectively, and the
exercise in full of all such Add-On Company Options on the Distribution
Date, whether or not then exercisable or in-the-money: (i) stock options
granted in tandem with stock appreciation rights in November of 1993 to
acquire 7,500 shares of Series A TCI Group Common Stock, of which options
to acquire 4,500 shares are currently exercisable; (ii) stock options
granted in tandem with stock appreciation rights in November of 1994 to
acquire 50,000 shares of Series A TCI Group Common Stock, of which options
to purchase 10,000 shares are currently exercisable; and (iii) stock
options granted in tandem with stock appreciation rights in December of
1995 to purchase 250,000 shares of Series A TCI Group Common Stock, of
which options to purchase 50,000 shares are currently exercisable.
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<PAGE>
Additionally assumes that shares of Series A Common to be issued in the
Distribution in respect of 15,000 restricted shares of Series A TCI Group
Common Stock are issued to Mr. Beddow. None of the restricted shares is
currently vested.
(5) Includes 117,300 shares of Series B Common Stock to be held by Dr.
Malone's wife, Mrs. Leslie Malone, but Dr. Malone is expected to disclaim
any beneficial ownership of such shares.
(6) Includes 477 shares of Series A Common Stock to be held by Mr. Goddard's
wife, but Mr. Goddard is expected to disclaim any beneficial ownership of
such shares.
(7) Includes 200 shares of Series A Common Stock and 1,029 shares of Series B
Common Stock to be held by a trust in which Mr. Goddard will be beneficial
owner as trustee.
(8) Assumes the receipt of Add-On Company Options and Add-On Company SARs in
respect of the following TCI Options and TCI SARs, respectively, and the
exercise in full of all such Add-On Company Options on the Distribution
Date, whether or not then exercisable or in-the-money: (i) stock options
granted in tandem with stock appreciation rights in November of 1994 to
acquire 4,000 shares of Series A TCI Group Common Stock, of which options
to acquire 800 shares of Series A TCI Group Common Stock are currently
exercisable; and (ii) stock options granted in tandem with stock
appreciation rights in December of 1995 to purchase 17,500 shares of
Series A TCI Group Common Stock, of which options to purchase 3,500 shares
of Series A TCI Group Common Stock are currently exercisable.
(9) Assumes the receipt of Add-On Company Options and Add-On Company SARs in
respect of the following TCI Options and TCI SARs, respectively, and the
exercise in full of all such Add-On Company Options on the Distribution
Date, whether or not then exercisable or in-the-money: (i) stock options
granted in tandem with stock appreciation rights in November of 1994 to
acquire 9,000 shares of Series A TCI Group Common Stock, of which options
to acquire 1,800 shares of Series A TCI Group Common Stock are currently
exercisable; and (ii) stock options granted in tandem with stock
appreciation rights in December of 1995 to purchase 10,000 shares of
Series A TCI Group Common Stock, of which options to purchase 2,000 shares
are currently exercisable.
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PRINCIPAL STOCKHOLDERS OF THE COMPANY
TCI currently owns all of the outstanding shares of Company Common Stock.
The following table lists shareholders expected by the Company to be the
beneficial owners of more than five percent of the outstanding Company Common
Stock upon completion of the Distribution, assuming each such person continued
to own beneficially on the Record Date the same number of shares of TCI Group
Common Stock believed by TCI to be owned beneficially by such person on April
30, 1996. The number of shares has been calculated in each case assuming that
the Company Common Stock will be distributed to TCI Group Stockholders on a
1:10 ratio.
<TABLE>
<CAPTION>
TITLE NUMBER OF SHARES PERCENT VOTING
NAME AND ADDRESS OF BENEFICIAL OWNER OF CLASS BENEFICIALLY OWNED OF CLASS (1) POWER (1)
- ------------------------------------ -------- ------------------ ------------ ---------
<S> <C> <C> <C> <C>
Bob Magness................ Series A 562,965(2)(3) * 26.3%
5619 DTC Parkway Series B 3,713,208(2) 43.9%
Englewood, Colorado
John C. Malone............. Series A 217,203(4) * 17.8%
5619 DTC Parkway Series B 2,533,208(5) 29.9%
Englewood, Colorado
Kearns-Tribune Series A 879,251 1.5% 7.0%
Corporation................
400 Tribune Building Series B 911,250 10.8%
Salt Lake City, Utah
The Associated Group, Series A 1,247,998 2.1% 5.8%
Inc........................
200 Gateway Towers Series B 707,185 8.4%
Pittsburgh, Pennsylvania
The Equitable Companies Series A 4,119,345(6) 7.1% 2.9%
Incorporated...............
787 Seventh Avenue Series B -- --
New York, New York; and
The Mutuelles AXA and AXA
101-100 Terrasse Boieldieu
92042 Paris La Defense
France
The Capital Group Series A 3,954,687(7) 6.8% 2.8%
Companies, Inc.............
333 South Hope Street Series B -- --
Los Angeles, California
</TABLE>
- --------
* Less than one percent.
(1) Assuming 58,336,191 shares of Series A Common Stock and 8,468,163 shares
of Series B Common Stock outstanding immediately following the
Distribution, based on 583,361,905 shares of Series A TCI Group Common
Stock and 84,681,629 shares of Series B TCI Group Common Stock outstanding
on April 30, 1996.
(2) Mr. Magness, as the executor of the Estate of Betsy Magness, will be the
beneficial owner of all shares of Series A Common Stock and Series B
Common Stock to be held of record by the Estate of Betsy Magness after the
Distribution. The number of shares to be held by Mr. Magness will include
210,533 shares of Series A Common Stock and 634,621 shares of Series B
Common Stock of which Mr. Magness will be beneficial owner as executor.
(3) Assumes the receipt of Add-On Company Options and Add-On Company SARs in
respect of the following TCI Options and TCI SARs, respectively, and the
exercise in full of all such Add-On Company Options on the Distribution
Date, whether or not then exercisable or in-the-money: (i) stock options
granted in tandem with stock appreciation rights in November of 1992 to
acquire 1,000,000 shares of Series A TCI Group Common Stock, of which
options to acquire 600,000 shares are currently exercisable; and (ii)
stock options granted in tandem with stock appreciation rights in December
of 1995 to acquire 1,000,000 shares of Series A TCI Group Common Stock, of
which options to purchase 200,000 shares are currently exercisable.
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<PAGE>
(4) See note (3) to the table in "Management of the Company--Stock Ownership
of Management."
(5) See note (5) to the table in "Management of the Company--Stock Ownership
of Management."
(6) The number of shares in the table is based upon a Schedule 13G, dated
February 9, 1996, filed by the Equitable Companies Incorporated, which
Schedule 13G reflects that said corporation has sole voting power over
30,729,443 shares and shared voting power over 1,002,725 shares of Series
A TCI Group Common Stock.
(7) Certain operating subsidiaries of The Capital Group Companies, Inc.
exercised investment discretion over various institutional accounts which
held, as of December 29, 1995, 39,546,870 shares of Series A TCI Group
Common Stock. Capital Guardian Trust Company, a bank, and one of such
operating companies, exercised investment discretion over 3,636,820 of
said shares. Capital Research and Management Company, a registered
investment advisor, and Capital International Limited and Capital
International, SA., other operating subsidiaries, had investment
discretion with respect to 35,565,750, 137,770 and 206,510 shares,
respectively, of the above shares. The information set forth above is
based upon a Schedule 13G, dated February 9, 1996, filed by The Capital
Group Companies, Inc. Assumes such arrangements will continue to apply
with regard to the Company Common Stock.
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DESCRIPTION OF COMPANY CAPITAL STOCK
GENERAL
The following description of the Company's capital stock is intended as a
summary only, does not purport to be complete and is subject to, and qualified
in its entirety by reference to, the applicable provisions of the Delaware
General Corporation Law (the "DGCL") and to the Company Charter and the
Company's Bylaws, both of which have been filed as exhibits to the Company
Form 10 pursuant to the Exchange Act.
The Company will be authorized to issue 195,000,000 shares of common stock,
par value $1.00 per share and 5,000,000 shares of preferred stock, par value
$.01 per share ("Preferred Stock"). The Company Common Stock will be divided
into two series, consisting of 185,000,000 authorized shares of Series A
Common Stock and 10,000,000 authorized shares of Series B Common Stock. Upon
completion of the Distribution, the Company estimates that there will be
approximately 58,445,000 shares of Series A Common Stock and 8,466,000 shares
of Series B Common Stock outstanding. No shares of Preferred Stock will be
issued in connection with the Distribution.
COMMON STOCK
The rights of holders of Series A Common Stock and Series B Common Stock are
identical except for voting and conversion rights. All of the shares of Series
A Common Stock and Series B Common Stock distributed to the TCI Group
Stockholders pursuant to the Distribution will be validly issued, fully paid
and nonassessable.
Voting. Each share of Series A Common Stock entitles the holder to one vote
and each share of Series B Common Stock entitles the holder to ten votes on
each matter to be voted upon by the holders of the Company Common Stock.
Except as may otherwise be required by the DGCL or, with respect to any series
of Preferred Stock, as otherwise provided in any resolution of the Company
Board providing for the establishment of such series of Preferred Stock, the
holders of the Series A Common Stock and the holders of the Series B Common
Stock and the holders of each series of Preferred Stock, if any, entitled to
vote thereon will vote as one class on all matters to be voted on by such
stockholders of the Company. Neither the holders of Series A Common Stock nor
the holders of Series B Common Stock have any rights to vote as a separate
class or series on any matter coming before the stockholders of the Company,
except for certain limited series voting rights provided under the DGCL. Under
the DGCL, the approval of the holders of a majority of the outstanding shares
of any class of capital stock of a corporation, voting separately as a class,
is required to approve any amendment to the charter that would alter or change
the powers, preferences or special rights of the shares of such class so as to
affect them adversely, provided that, if any amendment would alter or change
the powers, preferences or special rights of one or more series of the class
so as to affect them adversely, but would not so affect the entire class, then
only the shares of the series so affected by the amendment would be entitled
to vote thereon separately as a class. The Company Charter does not provide
for cumulative voting in elections of directors of the Company. Under the
Company's Bylaws, directors may be elected by a plurality of the votes of
shares present in person or represented by proxy at the meeting and entitled
to vote on the election of officers.
Conversion. Each share of Series B Common Stock is convertible at any time,
at the option of its holder, into one share of Series A Common Stock. The
Series A Common Stock is not convertible into Series B Common Stock.
Dividends. Subject to the preferential rights, if any, of the holders of
outstanding shares of any series of Preferred Stock, dividends may be paid on
the Company Common Stock as determined by the Company Board out of funds of
the Company legally available therefor under the DGCL. Except for dividends
declared or paid as described below under "--Share Distributions," any
dividends paid on the Series A Common Stock or the Series B Common Stock will
be paid only on both series, in equal amounts per share.
The Company Board will determine its dividend policy with respect to the
Company Common Stock based on the Company's results of operations, financial
condition, capital requirements and other circumstances,
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including restrictions that may be contained in agreements pursuant to which
the Company may borrow funds. It is the Company Board's present intention to
retain cash for the operations of the Company and it is not anticipated that
cash dividends will be paid on the Company Common Stock in the foreseeable
future.
Share Distributions. If at any time a distribution paid in Series A Common
Stock or Series B Common Stock or any other securities of the Company or of
any other corporation, partnership, limited liability company, trust or other
legal entity ("Person") (hereinafter sometimes called a "share distribution")
is to be made with respect to the Series A Common Stock or Series B Common
Stock, such share distribution will be declared and paid only as follows:
(a) a share distribution consisting of shares of Series A Common Stock
(or Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of Series A Common Stock) to holders
of Series A Common Stock and Series B Common Stock, on an equal per share
basis; or consisting of shares of Series B Common Stock (or Convertible
Securities that are convertible into, exchangeable for or evidence the
right to purchase shares of Series B Common Stock) to holders of Series A
Common Stock and Series B Common Stock, on an equal per share basis; or
consisting of shares of Series A Common Stock (or Convertible Securities
that are convertible into, exchangeable for or evidence the right to
purchase shares of Series A Common Stock) to holders of Series A Common
Stock and, on an equal per share basis, shares of Series B Common Stock (or
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of Series B Common Stock) to holders
of Series B Common Stock; and
(b) a share distribution consisting of shares of any class or series of
security of the Company or any other Person other than Series A Common
Stock or Series B Common Stock (or Convertible Securities that are
convertible into, exchangeable for or evidence the right to purchase shares
of Series A Common Stock or Series B Common Stock), either on the basis of
a distribution of identical securities, on an equal per share basis, to
holders of Series A Common Stock and Series B Common Stock or on the basis
of a distribution of one class or series of securities to holders of Series
A Common Stock and another class or series of securities to holders of
Series B Common Stock, provided that the securities so distributed (and, if
applicable, the securities into which the distributed securities are
convertible, or for which they are exchangeable, or which the distributed
securities evidence the right to purchase) do not differ in any respect
other than their relative voting rights and related differences in
designation, conversion and share distribution provisions, with holders of
shares of Series B Common Stock receiving the class or series having the
higher relative voting rights (without regard to whether such rights differ
to a greater or lesser extent than the corresponding differences in voting
rights and related differences in designation, conversion and share
distribution provisions between the Series A Common Stock and the Series B
Common Stock), provided that if the securities so distributed constitute
capital stock of a Subsidiary of the Company, such rights shall not differ
to a greater extent than the corresponding differences in voting rights,
designation, conversion and share distribution provisions between the
Series A Common Stock and the Series B Common Stock, and provided in each
case that such distribution is otherwise made on an equal per share basis.
The term "Convertible Securities" is defined in the Company Charter as any
securities of the Company (other than any series of Company Common Stock) that
are convertible into, exchangeable for or evidence the right to purchase any
shares of any series of Company Common Stock, whether upon conversion,
exercise, exchange, pursuant to anti-dilution provisions of such securities or
otherwise. As used in the Company Charter, the term "Subsidiary" means, when
used with respect to any Person, (i) a corporation in which such Person and/or
one or more Subsidiaries of such Person, directly or indirectly, owns capital
stock having a majority of the voting power of such corporation's capital
stock to elect directors under ordinary circumstances, and (ii) any other
Person (other than a corporation) in which such Person and/or one or more
Subsidiaries of such Person, directly or indirectly, has (x) a majority
ownership interest or (y) the power to elect or direct the election of a
majority of the members of the governing body of such first-named Person.
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The Company Charter provides that the Company shall not reclassify,
subdivide or combine the Series A Common Stock without reclassifying,
subdividing or combining the Series B Common Stock, on an equal per share
basis, and the Company shall not reclassify, subdivide or combine the Series B
Common Stock without reclassifying, subdividing or combining the Series A
Common Stock, on an equal per share basis.
Liquidation Rights. In the event of a liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, after payment or provision
for payment of the debts and other liabilities of the Company and subject to
the preferential rights, if any, of holders of any then outstanding shares of
any series of Preferred Stock, holders of shares of Series A Common Stock and
holders of shares of Series B Common Stock would be entitled to share ratably
in all assets of the Company available for distribution to holders of Company
Common Stock. Neither a consolidation, merger, nor sale of assets will be
construed to be a "liquidation", "dissolution" or "winding up" of the Company.
No Preemptive Rights. Holders of Company Common Stock have no preemptive
rights to subscribe for or purchase additional shares of capital stock or
other obligations or securities convertible into or exercisable for shares of
capital stock that may hereafter be issued by the Company.
PREFERRED STOCK
The Preferred Stock may be divided and issued in one or more series from
time to time as determined by the Company Board, without further stockholder
approval. The Company Board is authorized to establish, by resolution, the
number of shares of each series, the powers, designations, preferences and
relative, participating, optional or other rights of each such series, and the
qualifications, limitations, or restrictions thereof. All shares of any one
series of Preferred Stock are required to be alike in every particular. Except
to the extent otherwise provided in the resolution or resolutions providing
for the issue of any series of Preferred Stock, the holders of shares of such
series will have no voting rights except as may be required by Delaware law.
At the date of this Information Statement, the Company Board has not
authorized the issuance of any shares of Preferred Stock and the Company has
no current plans for the issuance of any shares of Preferred Stock.
ANTITAKEOVER EFFECTS OF CERTAIN STATUTORY PROVISIONS AND PROVISIONS OF THE
COMPANY CHARTER AND BYLAWS
General. The DGCL, the Company Charter and the Company's Bylaws contain
provisions which may serve to discourage or make difficult a change in control
of the Company without the support of the Company Board or without meeting
various other conditions. These provisions are designed to enable the Company
Board, particularly in the initial years of the Company's existence as an
independent, publicly owned company, to develop the Company's business in a
manner that will foster its long-term growth without the potential disruption
that might be entailed by the threat of a takeover not deemed by the Company
Board to be in the best interests of the Company and its stockholders. Many of
these provisions are also present in TCI's Restated Certificate of
Incorporation or Bylaws.
The principal provisions of the DGCL and the aforementioned corporate
governance documents are outlined below. The following description of these
provisions is intended as a summary only, does not purport to be complete and
is subject to, and qualified in its entirety by reference to, the DGCL, the
Company Charter and the Company's Bylaws.
Antitakeover Legislation. Section 203 of the DGCL, in general, prohibits a
"business combination" between a Delaware corporation and an "interested
stockholder" within three years following the time that such stockholder
became an "interested stockholder" unless (i) prior to such time, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, exclusive of shares owned by directors who are
also officers and by certain employee stock plans, or (iii) at or subsequent
to such time, the business combination
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is approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote
of at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
The term "business combination" is defined by the DGCL to include, among
other transactions between the interested stockholder and the corporation or
any direct or indirect majority owned subsidiary thereof, a merger or
consolidation; a sale, pledge, transfer or other disposition (including as
part of a dissolution) of assets having an aggregate market value equal to 10%
or more of either the aggregate market value of all assets of the corporation
on a consolidated basis or the aggregate market value of all the outstanding
stock of the corporation; certain transactions that would increase the
interested stockholder's proportionate share ownership of the stock of any
class or series of the corporation or such subsidiary; and any receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation or
any such subsidiary. In general, and subject to certain exceptions, an
"interested stockholder" is any person (other than the corporation and any
direct or indirect majority owned subsidiary of the corporation) who is the
owner of 15% or more of the outstanding voting stock (or, in the case of a
corporation with classes of voting stock with disparate voting power, 15% or
more of the voting power of the outstanding voting stock) of the corporation,
and the affiliates and associates of such person. The term "owner" is broadly
defined to include any person that individually or with or through his or its
affiliates or associates, among other things, beneficially owns such stock, or
has the right to acquire such stock (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement or
understanding or upon the exercise of warrants or options or otherwise or has
the right to vote such stock pursuant to any agreement or understanding, or
has an agreement or understanding with the beneficial owner of such stock for
the purpose of acquiring, holding, voting or disposing of such stock. The
restrictions of DGCL Section 203 do not apply to corporations that have
elected, in the manner provided therein, not to be subject to such section or,
with certain exceptions, which do not have a class of voting stock that is
listed on a national securities exchange or authorized for quotation on an
interdealer quotation system of a registered national securities association
or held of record by more than 2,000 stockholders.
The Company Charter does not contain any provision "opting out" of the
application of DGCL Section 203 and the Company has not taken any of the
actions necessary for it to "opt out" of such provision. As a result, the
provisions of Section 203 will remain applicable to transactions between the
Company and any of its "interested stockholders". The Company Board has,
however, approved the following transactions which could result in certain
persons becoming interested stockholders within the meaning of DGCL Section
203, and by such approval has exempted persons who become interested
stockholders as a result of such transactions from the application of such
section: (a) the acquisition of Company Common Stock by a TCI Group
Stockholder pursuant to the Distribution, (b) the grant of Add-on Company
Options to holders of TCI Options and the grant of Add-on Company SARs to
holders of TCI SARs on the Distribution Date and the issuance of shares of
Series A Common Stock upon the exercise thereof, and (c) the grant of Options
and other Awards payable in Series A Common Stock to employees and directors
of the Company under the 1996 Plan and the Nonemployee Director Plan and the
issuance of shares of Series A Common Stock upon the exercise thereof. See
"Management of the Company--Compensation of Directors," "Management of the
Company--Compensation of Executive Officers," "Management of the Company--The
TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan" and "The
Distribution--Treatment of Outstanding Stock Options and SARs."
Classified Board of Directors. The Company Charter provides for a Company
Board of not less than three members, divided into three classes, as nearly
equal in number as possible, serving staggered three-year terms. The initial
terms of the Company's Class I, Class II and Class III directors expire at the
1997, 1998 and 1999 annual stockholders' meetings, respectively. Starting with
the 1997 annual meeting of stockholders, one class of directors will be
elected each year for a three-year term.
At least two annual meetings of stockholders, instead of one, will generally
be required to effect a change in a majority of the Company Board. The Company
believes that such a delay is advantageous to the Company and its stockholders
because it may help ensure that the Company's directors, if confronted by a
stockholder attempting to force a proxy contest, a tender offer, or an
extraordinary corporate transaction, would have
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sufficient time to review the proposal as well as any available alternatives
to the proposal and to act in what they believe to be the best interest of the
stockholders. In addition, the Company believes that the longer time required
to elect a majority of a classified Company Board will help to ensure
continuity and stability of the Company's management and policies. The
classification of the Company Board will enhance the ability of the Company's
management to effect the Company's long-term business strategies and policies
as determined by the Company Board because in most cases a majority of the
directors at any given time will have had prior experience as directors of the
Company. The Company believes that this, in turn, will permit the Company
Board to represent more effectively the interests of all stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the Company Board would
be beneficial to the Company and its stockholders and whether or not a
majority of the Company's stockholders believe that such a change would be
desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or
otherwise attempting to obtain control of the Company, even though such an
attempt might be beneficial to the Company and its stockholders. The
classification of the Company Board could thus increase the likelihood that
incumbent directors will retain their positions. In addition, because under
the Company Charter directors may be removed only for cause, a classified
Company Board would delay stockholders who do not agree with the policies of
the Company Board from replacing a majority of the Company Board for two
years, unless they can demonstrate that the directors should be removed for
cause and obtain the requisite vote.
Number of Directors; Removal; Filling Vacancies. The Company Charter and the
Bylaws provide that, subject to the rights of holders of any series of
Preferred Stock to elect additional directors, the number of directors will be
fixed by the Company Board by resolution, but there shall be no fewer than
three directors. The Bylaws provide that the Company Board, by resolution
adopted by the affirmative vote of 75% of the members of the Company Board
then in office, may increase or decrease the number of directors. In addition,
the Company Charter and the Bylaws provide that, subject to the rights of
holders of any series of Preferred Stock, vacancies on the Company Board may
be filled only by the affirmative vote of a majority of the remaining
directors then in office (even though less than a quorum) or by the sole
remaining director. Accordingly, the Company Board could temporarily prevent
any stockholder from obtaining majority representation on the Company Board by
enlarging the size of the Company Board and filling the new directorships with
such stockholder's own nominees.
Under the DGCL, directors serving on a classified board may be removed by
the stockholders only for cause. Moreover, the Company Charter and the Bylaws
provide that, subject to the rights of holders of any series of Preferred
Stock, directors may be removed for cause only upon the affirmative vote of
holders of at least 66 2/3% of the total voting power of the then outstanding
shares of Series A Common Stock, Series B Common Stock and any series of
Preferred Stock entitled to vote at an election of directors, voting together
as a single class.
Mergers, Consolidations and Sale of Assets. The Company Charter provides
that, subject to the rights of holders of any series of Preferred Stock, the
affirmative vote of 66 2/3% of the total voting power of the outstanding
Voting Securities, voting together as a single class, is required to approve
(a) a merger or consolidation of the Company with, or into, another
corporation, other than a merger or consolidation which does not require the
consent of stockholders under the DGCL or a merger or consolidation which has
been approved by at least 75% of the members of the Company Board (in which
case, in accordance with the DGCL, the affirmative vote of a majority in total
voting power of the outstanding Voting Securities would, with certain
exceptions, be required for approval), (b) the sale, lease or exchange of all
or substantially all of the property and assets of the Company or (c) the
dissolution of the Company. "Voting Securities" is currently defined in the
Company Charter as the Series A Common Stock, the Series B Common Stock and
any series of Preferred Stock entitled to vote with the holders of Company
Common Stock generally upon all matters that may be submitted to a vote of
stockholders at any annual meeting or special meeting thereof.
Amendment of the Company Charter and the Bylaws. Under the DGCL, the
stockholders have the right to adopt, amend or repeal the certificate of
incorporation and bylaws of a corporation. In addition, if the certificate
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of incorporation so provides, the bylaws may be amended by the board of
directors. The Company Charter provides that the affirmative vote of 66 2/3%
in total voting power of the outstanding Voting Securities, voting together as
a single class, is required to approve any amendment, alteration or repeal of
any provision of the Company Charter or the addition or insertion of other
provisions therein. The Company Charter further provides that provisions of
the Company's Bylaws may be adopted, amended or repealed by the affirmative
vote of (i) 66 2/3% in total voting power of the outstanding Voting
Securities, voting together as a single class, or (ii) 75% of the members of
the Company Board. These voting requirements will have the effect of making
more difficult any amendment by stockholders of the Company's Bylaws or the
Company Charter, even if a majority of the Company's stockholders believe that
such amendment would be in their best interests.
No Stockholder Action by Written Consent; Special Meetings of
Stockholders. The Company Charter and the Company's Bylaws provide that,
subject to the rights of holders of any series of Preferred Stock, stockholder
action can be taken only at an annual or special meeting of stockholders and
no action may be taken by the written consent of stockholders in lieu of a
meeting. The Company Charter and the Company's Bylaws provide that, except as
otherwise provided by law or in the terms of any series of Preferred Stock,
special meetings of stockholders may be called by the Secretary of the Company
(i) upon the written request of the holders of not less than 66 2/3% in total
voting power of the outstanding Voting Securities or (ii) at the request of
not less than 75% of the members of the Company Board then in office.
The provisions of the Company Charter and the Company's Bylaws prohibiting
stockholder action by written consent in lieu of a meeting will prevent the
holders of a majority of the voting power of the Company from using the
written consent procedure to take stockholder action, thereby ensuring that
all of the stockholders will have the opportunity to participate at a duly
called meeting in determining future corporate actions. In addition, the
requirement that special meetings of stockholders be called upon the request
of 66 2/3% of the total voting power of the Voting Securities or 75% of the
members of the Company Board will prevent the calling of a special meeting by
the holders of less than the percentage of the total voting power of the
Voting Securities necessary to approve a merger or consolidation of the
Company or an amendment to the Company Charter or the Bylaws.
These provisions may be deemed to have an antitakeover effect because such
provisions will limit the ability of stockholders to call special meetings in
order to consider a merger or consolidation or amendment to the Company
Charter or the Company's Bylaws and, absent the request of holders having the
voting power required to approve such transactions, will enable 26% of the
members of the incumbent Company Board to delay until an annual meeting
stockholder consideration of such matters, even if the holders of a majority
of the outstanding voting power of the Company favored such a special meeting.
Such provisions might also have the effect of making more difficult the
removal of incumbent management (through, for example, amendments to the
Company Charter) at such time as the stockholders might believe such action to
be appropriate.
The Company Board, however, believes that these provisions will prevent the
business of the Company from being disrupted between annual meetings by the
calling of special meetings by stockholders holding less than the requisite
percentage of the voting power of the outstanding Voting Securities required
to effectuate any such transaction or amendment or by attempts to take
stockholder action by written consent, and will also provide greater time for
consideration of any proposal submitted by a stockholder to the extent that
his or her proposal would be deferred until the next annual meeting of
stockholders. These provisions will not affect the calling of special meetings
of stockholders by 75% of the members of the Company Board, if in their
opinion, there are matters to be acted upon which are in the interests of the
Company and its stockholders.
Advance Notice Provisions for Stockholder Nominations. The Company's Bylaws
establish an advance notice procedure for stockholders to make nominations of
candidates for election as directors. Nominations of candidates for election
to the Company Board may be made at an annual meeting of stockholders (i)
pursuant to the Company's notice of meeting, (ii) by, or at the direction of,
the Chairman of the Board or the Company Board, or (iii) by a stockholder of
the Company who is entitled to vote at the meeting, has given timely written
notice to the Secretary of the Company in accordance with the procedures set
forth in the Bylaws and was a
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stockholder of record at the time such notice was given. The Bylaws further
provide that at a special meeting at which directors are to be elected,
nominations of candidates for election to the Company Board can be made only
(i) by, or at the direction of, the Company Board, or (ii) by a stockholder of
the Company who has given timely written notice to the Secretary of the
Company.
For notice of stockholder nominations to be made at an annual meeting to be
timely, such notice must be delivered to the Secretary of the Company not less
than 90 days nor more than 120 days prior to the first anniversary of the
preceding year's annual meeting (or if the date of the annual meeting is
advanced by more than 20 days or delayed by more than 70 days from such
anniversary date, not earlier than the 120th day prior to such annual meeting
and not later than the later of (x) the 90th day prior to such annual meeting
and (y) the tenth day after public announcement of the date of such meeting is
first made). For notice of a stockholder nomination to be made at a special
meeting at which directors are to be elected to be timely, such notice must be
delivered to the Secretary not earlier than the 120th day before such special
meeting and not later than the later of (x) the 90th day prior to such special
meeting and (y) the tenth day after public announcement is first made of the
date of such special meeting.
A stockholder's notice to the Company proposing to nominate a person for
election as a director must contain certain information, including, without
limitation, the identity and address of the nominating stockholder and the
beneficial owner, if any, on whose behalf the nomination is made, the series
and number of shares of capital stock of the Company which are owned by such
stockholder and beneficial owner, a representation that such stockholder is
entitled to vote at the meeting and intends to appear in person or by proxy at
the meeting to nominate the person specified in the notice, all information
regarding the proposed nominee that would be required to be included in a
proxy statement soliciting proxies for the proposed nominee and the consent of
the nominee to serve as a director of the Company if so elected. If the
Chairman of the Board or other officer presiding at a meeting determines that
a person was not nominated in accordance with the required procedures, such
person will not be eligible for election as a director.
The requirement of advance notice of nominations by stockholders will afford
the Company Board a meaningful opportunity to consider the qualifications of
the proposed nominee and, to the extent deemed necessary or desirable by the
Company Board, to inform stockholders about such qualifications. Although the
Company Charter and the Bylaws do not give the Company Board any power to
approve or disapprove stockholder nominations for the election of directors,
they may have the effect of precluding a contest for the election of directors
if the proper procedures are not followed, and of discouraging or deterring a
third party from conducting a solicitation of proxies to elect its own slate
of directors, without regard to whether consideration of such nominees might
be harmful or beneficial to the Company and its stockholders.
Voting Rights. Each share of Series A Common Stock entitles the holder to
one vote and each share of Series B Common Stock entitles the holder to ten
votes on each matter presented to stockholders. The Series A Common Stock and
the Series B Common Stock vote together as a single class. The voting power
afforded to the holders of the Series B Common Stock may be deemed to have an
antitakeover effect as such concentration of voting power may have the effect
of discouraging a third party from making a tender offer or otherwise
attempting to obtain control of the Company even though such an attempt might
be economically beneficial to the Company and its stockholders. In addition,
the disparate voting rights of the two series of Company Common Stock may
affect the ability of holders of Series A Common Stock to change the Company
Board or to benefit from transactions that are opposed by the holders of a
significant number of shares of Series B Common Stock, even though such
actions may be in the interests of the holders of a majority of the shares of
Company Common Stock. Because such concentration of voting power may make it
more difficult to and thereby discourage an effort to acquire the Company, the
stockholders may be deprived of an opportunity to sell their shares in a
tender offer or to sell their shares at a premium over prevailing market
prices.
Preferred Stock. The Company Charter authorizes the Company Board to issue
five million shares of Preferred Stock, in one or more series, and to
establish the powers, preferences, rights and privileges thereof to the full
extent permitted by law. The Company believes that the ability of the Company
Board to issue one or
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more series of Preferred Stock will provide the Company with increased
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs that might arise. The authorized shares of
Preferred Stock, as well as the authorized shares of Company Common Stock,
will be available for issuance without further action by the Company's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. If the approval of the Company's
stockholders is not required for the issuance of shares of Preferred Stock or
Company Common Stock, the Company Board does not intend to seek stockholder
approval. The Company Board will make any determination to issue such shares
based on its judgment as to the best interests of the Company and its
stockholders. The Company Board, in so acting, could issue Company Common
Stock and/or Preferred Stock in connection with an attempt to acquire control
of the Company or other transaction, and the terms of such series of Preferred
Stock could be designed to discourage such acquisition attempt or other
transaction, notwithstanding that some, or a majority, of the Company's
stockholders might believe such acquisition or other transaction to be in
their best interests or that stockholders might receive a premium for their
stock over the then current market price of such stock as a result thereof.
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION
The Company Charter provides that, to the fullest extent permitted by the
DGCL as it presently exists or may hereafter be amended, a director will not
be liable to the Company or its stockholders for monetary damages for breach
of fiduciary duty as a director. Under existing Delaware law, directors would
not be liable except (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL (involving the payment of an unlawful dividend),
or (iv) for any transaction from which the director derived improper personal
benefit. While the Company Charter provides directors with protection from
awards for monetary damages for breach of their duty of care, it does not
eliminate such duty. Accordingly, the Company Charter will have no effect on
the availability of equitable remedies, such as an injunction or rescission,
based on a director's breach of his or her duty of care.
Delaware law contains provisions permitting and, in some situations,
requiring Delaware corporations, such as the Company, to provide
indemnification to their officers and directors for losses and litigation
expenses incurred in connection with their service to the corporation in those
capacities. The Company Charter requires the Company to indemnify and hold
harmless, to the fullest extent permitted by applicable law as it presently
exists or may hereafter be amended, any person who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he, or a person for whom he is the legal
representative, is or was a director or officer of the Company or is or was
serving at the request of the Company as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such person. The Company's Bylaws
provide that such right of indemnification applies to the respective heirs,
personal representatives and successors in interest of members of the Company
Board and officers of the Company for or on account of any action performed on
behalf of the Company. The Company Charter also requires the Company to pay
the expenses (including attorneys' fees) incurred by a director or officer in
defending any proceeding in advance of its final disposition upon receipt of
an undertaking by the director or officer to repay all advanced amounts if it
should ultimately be determined that the director or officer is not entitled
to indemnification. If a valid claim for indemnification or payment of
expenses is not paid in full within 60 days after a written claim therefor has
been received by the Company, the claimant may file suit to recover the unpaid
amount of such claim and, if successful in whole or in part, will be entitled
to be paid the expense of prosecuting such claim. In any such action, the
Company will have the burden of proving that the claimant was not entitled to
the requested indemnification or payment of expenses under applicable law.
The Company Charter provides that the indemnification right stated therein
is not exclusive of any other rights that a person may have or may in the
future acquire under any statute, provision of the Company Charter, the
Bylaws, agreement, vote of stockholders or resolution of disinterested
directors or otherwise. The Company
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Charter further states that no amendment, modification or repeal of the above-
described Company Charter provisions shall adversely affect any limitation,
right or protection of a director or officer under such Company Charter
provision in respect of any act or omission occurring prior to the time of
such amendment, modification or repeal.
The Company will enter into indemnification agreements with each of its
directors. The indemnification agreements will generally provide (i) for the
prompt indemnification to the fullest extent permitted by law against (a) any
and all expenses, including attorneys' fees and all other costs paid or
incurred in connection with investigating, preparing to defend, defending or
otherwise participating in, any threatened, pending or completed action, suit
or proceeding related to the fact that such indemnitee is or was a director,
officer, employee, agent or fiduciary of the Company or is or was serving at
the Company's request as a director, officer, employee, trustee, agent or
fiduciary of another entity, or by reason of anything done or not done by such
indemnitee in any such capacity, and (b) any and all judgments, fines,
penalties and amounts paid in settlement of any claim, unless the "Reviewing
Party" (defined as one or more members of the Company Board or appointee(s) of
the Company Board, who are not parties to the particular claim, or independent
legal counsel) determines that such indemnification is not permitted under
applicable law and (ii) for the prompt advancement of expenses to an
indemnitee as well as the reimbursement by such indemnitee of such advancement
to the Company if the Reviewing Party determines that the indemnitee is not
entitled to such indemnification under applicable law. In addition, the
indemnification agreements will provide (i) a mechanism through which an
indemnitee may seek court relief in the event the Reviewing Party determines
that the indemnitee would not be permitted to be indemnified under applicable
law (and would therefore not be entitled to indemnification or expense
advancement under the indemnification agreement) and (ii) indemnification
against all expenses, including attorneys' fees, and the advancement thereof,
if requested, incurred by the indemnitee in any action brought by the
indemnitee to enforce an indemnity claim or to collect an advancement of
expenses or to recover under a directors' and officers' liability insurance
policy, regardless of whether such action is ultimately successful or not.
Furthermore, the indemnification agreements will provide that after there has
been a "change in control" in the Company (as defined in the indemnification
agreements), other than a change in control approved by a majority of
directors who were directors prior to such change, then, with respect to all
determinations regarding rights to indemnification and the advancement of
expenses, the Company will seek legal advice as to the right of the indemnitee
to indemnification under applicable law only from independent legal counsel
selected by the indemnitee and approved by the Company.
The indemnification agreements will impose upon the Company the burden of
proving that an indemnitee is not entitled to indemnification in any
particular case and negate certain presumptions that may otherwise be drawn
against an indemnitee seeking indemnification in connection with the
termination of actions in certain circumstances. Indemnitees' rights under the
indemnification agreements are not exclusive of any other rights they may have
under Delaware law, the Company's Bylaws or otherwise. Although not requiring
the maintenance of directors' and officers' liability insurance, the
indemnification agreements require that indemnitees be provided with the
maximum coverage available for any director or officer of the Company if there
is such a policy.
The Company may purchase liability insurance policies covering its directors
and officers.
INDEPENDENT AUDITORS
The Company Board has designated KPMG Peat Marwick LLP as the Company's
independent auditors for the 1996 fiscal year. TCI, as the Company's sole
stockholder, has approved the designation.
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GLOSSARY OF TERMS
1996 Plan. TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan.
1996 Telecom Act. Telecommunications Act of 1996.
ACC. Advanced Communications Corporation.
Add-on Company Option. Option to purchase Series A Common Stock, issuable in
connection with the Distribution to holders of existing TCI Options. See "The
Distribution--Treatment of Outstanding TCI Stock Options and SARs."
Adjusted TCI Option. Option to purchase Series A TCI Group Common Stock,
issuable in connection with the Distribution to holders of existing TCI
Options. See "The Distribution--Treatment of Outstanding TCI Stock Options and
SARs."
Alphastar. Alphastar, Inc., a subsidiary of Tee-Com Electronics, Inc., a
Canadian company.
Apple. Apple Computer, Inc., a California corporation.
AT&T. AT&T Corp.
Authorized Units. Number of active authorized satellite receivers, more than
one of which may be installed in a subscribing household.
Awards. Grants of Options, SARs, Restricted Shares, Stock Units, Performance
Awards or any combination thereof, made pursuant to the 1996 Plan.
Bose. Bose Corporation, a Massachusetts corporation.
box. See "IRD" and "satellite receiver."
BSS. Broadcast Satellite Service, which operates at high power in the Ku-
band.
churn. Subscriber termination of satellite television service.
Code. Internal Revenue Code of 1986, as amended.
Comcast. Comcast Corporation.
Commercial Market. Commercial customers and potential customers of digital
satellite television service, such as restaurants, bars, hotels and motels,
multiple dwelling units, businesses and schools.
Committee. Compensation Committee of the Company Board, or such other
committee as the Board may in the future appoint to administer the 1996 Plan.
Communications Act. Communications Act of 1934, as amended.
Company. TCI Satellite Entertainment, Inc., a Delaware corporation and a
wholly owned subsidiary of TCI prior to the Distribution. Unless the context
otherwise requires, also refers to (i) TCI's collective interests in the
Digital Satellite Business before the Distribution Date, and (ii) TCI
Satellite Entertainment, Inc. and its consolidated subsidiaries on and after
the Distribution Date.
Company Board. Board of Directors of the Company.
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Company Charter. Restated Certificate of Incorporation of the Company.
Company Common Stock. Series A Common Stock and Series B Common Stock.
Company Form 10. Registration Statement on Form 10, including exhibits,
schedules and amendments thereto, filed by the Company with the SEC.
Company Note. A promissory note in the principal amount of $250,000,000 to
be issued by the Company to TCIC on or before the Distribution Date pursuant
to the Reorganization Agreement and the TCIC Credit Facility, evidencing a
portion of the Company's intercompany balance owed to TCIC on the date of
issuance.
Company Satellites. Two high power direct broadcast satellites, which Tempo
has agreed to purchase from Loral pursuant to the Satellite Construction
Agreement.
Construction Permit. Construction permit held by Tempo and issued by the FCC
to build, launch and operate a DBS system.
Continental. Continental Cablevision, Inc.
Counsel. Baker & Botts, L.L.P.
Cox. Cox Communications, Inc.
DBS. Direct Broadcast Satellite.
Decrees. The State Decree and the Federal Decree.
Delivery. Delivery of a satellite by Loral to Tempo, in accordance with the
Satellite Construction Agreement.
DGCL. Delaware General Corporation Law.
Digital. TCI Digital Satellite Entertainment, Inc., a Colorado corporation.
Digital compression. Conversion of the standard analog video signal into a
digital signal, and the compression of that signal so as to facilitate
multiple channel transmission through a single transponder.
Digital Satellite Business. Business of distributing multichannel
programming services directly to consumers in the U.S. via digital medium
power or high power satellite, including the rental and sale of customer
premises equipment relating thereto.
DirectSat. DirectSat Corporation.
DirecTv. DirecTv, Inc., a subsidiary of Hughes Electronics Corporation, a
Delaware corporation.
DISCO II. Domestic International Satellite Consolidation Order, an NPRM
adopted by the FCC in May 1996.
Distribution. Distribution by TCI to the TCI Group Stockholders of all of
the issued and outstanding Company Common Stock.
Distribution Date. , 1996, the date the Distribution will be made.
Distributors. Affiliates of each of the partners of PRIMESTAR Partners other
than GEAS, including the Company, who are authorized distributors of
PRIMESTAR(R).
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Dividend Equivalents. Cash or property corresponding to all dividends and
distributions (or the economic equivalent thereof) in respect of Restricted
Shares issued at the end of the Restriction Period that would have been paid,
made or declared on such Restricted Shares had such shares been issued at the
beginning of the Restriction Period.
EchoStar. EchoStar Communications Corp., a Nevada corporation.
Employee Plan. Qualified Employee Stock Purchase Plan to be established by
the Company.
End-of-Life Option. PRIMESTAR Partners' option, exercisable prior to the
later of December 31, 1996 and 45 days after written notice from GE Americom to
the Partnership that delivery of GE-2 has occurred under GE Americom's
construction contract, to extend the agreement between PRIMESTAR Partners and
GE Americom with respect to the use of up to 24 transponders on GE-2.
ESPP. TCI Employee Stock Purchase Plan.
Exchange Act. Securities Exchange Act of 1934, as amended.
Executive Branch Letter. Joint letter filed with the FCC by four cabinet-
level departments of the Executive Branch regarding WTCI's application for FCC
authorization to construct and operate an earth station to uplink video
programming to the Company Satellites.
Exercise Price. $1,000,000, which PRIMESTAR Partners would be obligated to
pay Tempo upon the exercise of the Tempo Option.
FCC. Federal Communications Commission.
FCC Auction. FCC auction held in January 1996 of 28 frequencies at the
110(degrees) W.L. orbital location and 24 frequencies at the 148(degrees) W.L.
orbital location.
Federal Decree. Consent decree entered in United States v. PRIMESTAR
Partners, L.P., et al., 93 Civ. 3913 (SDNY, 1993).
Free Standing SAR. SAR granted under the 1996 Plan to an eligible employee
who is not the holder of an Option.
FSS. Fixed Satellite Service, which includes medium power services
transmitting in the Ku-band, as well as low power services transmitting in the
C-band.
Fulfillment Agreement. Agreement entered into between TCIC and the Company,
pursuant to which TCIC will continue to provide fulfillment services to the
Company following the Distribution with respect to certain customers of the
PRIMESTAR(R) medium power service.
G.E. General Electric Company.
GE-2. GE Americom medium power satellite that GE Americom currently expects
to launch on January 31, 1997 to replace K-1, and make operational within 60
days after launch.
GE-3. GE Americom medium power satellite that is expected to serve as an in-
orbit spare for GE-2. GE-3 is still under construction and is expected to be
available for launch in the summer of 1997.
GE-2 Agreement. Amended and Restated Memorandum of Agreement, effective as of
October 18, 1996, between PRIMESTAR Partners and GE Americom.
GE Americom. GE American Communications, Inc., a Delaware corporation. GE
Americom is a subsidiary of G.E. and the parent company of GEAS.
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GEAS. G.E. Americom Services, Inc., a Delaware corporation and a partner of
PRIMESTAR Partners.
GI. General Instruments Corporation, a Delaware corporation.
HSD. Home satellite dish.
HSR Act. Hart-Scott-Rodino Antitrust Improvement Act of 1974, as amended.
homes passed. Homes that can be connected to a cable distribution system
without further extension of the cable distribution network.
ILS. International Launch Services.
Incentive Options. Options granted pursuant to the 1996 Plan which are
incentive stock options within the meaning of Section 422 of the Code.
Indemnification Agreements. Indemnification Agreements between (i) the
Company and TCITV, relating to the Telesat Transaction, (ii) the Company and
TCI UA 1, relating to a letter of credit issued for the account of TCI UA 1,
which supports the PRIMESTAR Credit Facility, and (iii) the Company and TCIC,
relating to a letter of credit issued for the account of two subsidiaries of
TCI to support the Company's share of PRIMESTAR Partners' obligations under
the GE-2 Agreement, with respect to PRIMESTAR Partners' use of transponders on
GE-2.
IRD. Integrated receiver/decoder; a set-top satellite television receiver.
Joint Venture. Netlink USA/Superstar Satellite Entertainment Joint Venture;
a C-band satellite program distributor.
K-1. Satcom K-1, a GE Americom medium power satellite located at 85(degrees)
W.L., from which PRIMESTAR Partners currently broadcasts.
K-1 Notes. Promissory notes to be issued in connection with the Distribution
by two subsidiaries of the Company for the purchase of TCIC's partnership
interests in PRIMESTAR Partners, which promissory notes will be assumed by TCI
on or before the Distribution Date in the form of a capital contribution to
the Company.
K-2. Satcom K-2, a GE Americom medium power satellite that will replace K-1
in November 1996.
Kearns-Tribune. Kearns-Tribune Corporation, a Utah corporation.
Liberty Media Group. TCI's programming and electronic retailing businesses.
Liberty Media Group Common Stock. Tele-Communications, Inc. Series A Liberty
Media Group Common Stock, $1.00 par value per share, and Tele-Communications,
Inc. Series B Liberty Media Group Common Stock, $1.00 par value per share.
License Agreement. Trade Name and Service Mark License Agreement by and
between TCI and the Company.
LKE. Lockheed-Khrunichev-Energia, Inc., a joint venture between Lockheed-
Martin and two Russian Federation state-owned companies.
LMDS. Local multi-point distribution service.
LNB. Low noise block converter, a component of HSDs.
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Lockheed-Martin. Lockheed Martin Corporation.
LodgeNet. LodgeNet Entertainment Corporation, a Delaware corporation.
Loral. Space Systems/Loral, Inc., a New York corporation.
Master Agents. Four master sales agents engaged by the Company to distribute
PRIMESTAR(R), including Metron Digital Services, Inc., CVS Systems, Inc.,
Resource Electronics, Inc. and Recreation Sports and Imports, Inc.
MCI. MCI Communications Corp., a Delaware corporation.
MCI/News Corp. Joint venture between MCI and News Corp. that expects to
commence offering high power service by the end of 1997.
MDU. Multiple dwelling unit.
MMDS. Multi-channel multi-point distribution service; a one-way radio
transmission of television channels over microwave frequencies from a fixed
station transmitting to multiple receiving facilities located at fixed points.
National Call Center. National call center maintained by the Company for
orders, information and customer service.
Newhouse. Newhouse Broadcasting Corporation.
News Corp. The News Corporation Limited, an Australian corporation.
Nonqualified Options. Options granted pursuant to the 1996 Plan, which are
nonqualified stock options under Section 422 of the Code.
NPRM. Notice of proposed rulemaking.
Operating Cash Flow. Operating income before depreciation. Operating Cash
Flow is a commonly used measure of value and borrowing capacity within the
Company's industry, and is not intended to be a measure of performance in
accordance with generally accepted accounting principles and should not be
relied upon as such.
Operating Services Agreement. Operating Services Agreement between Telesat
and TCITV, dated as of May 6, 1996, entered into in connection with the
Telesat Transaction. Pursuant to the Reorganization Agreement, on or before
the Distribution Date, TCITV will assign its rights and obligations under the
Operating Services Agreement to a subsidiary of the Company, as contemplated
by the Operating Services Agreement.
Option Agreement. Agreement entered into by Tempo and PRIMESTAR Partners in
February 1991, granting PRIMESTAR Partners the Tempo Option.
Options. Stock options granted pursuant to the 1996 Plan.
Participant Contributions. Pre-tax contributions, after-tax contributions or
both made by a participant to the Employee Plan.
Partners Committee. Committee of the Partnership, composed of
representatives of the partners of the Partnership and two independent
members, that manages and controls the business and affairs of PRIMESTAR
Partners pursuant to the PRIMESTAR Partnership Agreement.
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Partnership. PRIMESTAR Partners, L.P., a Delaware limited partnership.
Passed by cable. With access to cable television.
Performance Awards. Performance awards granted pursuant to the 1996 Plan.
Person. Any corporation (other than the Company), partnership, limited
liability company, trust or other legal entity.
Preferred Stock. Preferred stock, par value $.01 per share, of TCI Satellite
Entertainment, Inc.
PRIMESTAR(R). The PRIMESTAR(R) programming service.
PRIMESTAR Credit Facility. Bank credit facility obtained by PRIMESTAR
Partners to finance advances to Tempo for payments due in respect of the
Company Satellites under the Satellite Construction Agreement, and supported
by letters of credit arranged for by affiliates of the partners of the
Partnership (other than GEAS).
PRIMESTAR Partners. PRIMESTAR Partners, L.P., a Delaware limited
partnership.
PRIMESTAR Partnership Agreement. Limited Partnership Agreement of PRIMESTAR
Partners (then known as K Prime Partners, L.P.), dated as of February 8, 1990,
as amended.
PRIMESTAR Satellite Signal. Satellite signal used by PRIMESTAR Partners to
transmit its programming services.
Private cable system. Satellite master antenna television system that
provides television programming services to residential MDUs through cable
plant or other equipment that is located entirely on private property and does
not constitute a direct-to home distribution system or a franchised cable
system.
Record Date. , 1996.
Reorganization Agreement. Agreement to be entered into on or before the
Distribution Date by TCI, TCIC and a number of other TCI subsidiaries,
including the Company and its subsidiaries, which will provide for, among
other things, the principal corporate transactions required to effect the
Distribution, the conditions thereto and certain provisions governing the
relationship between the Company and TCI with respect to and resulting from
the Distribution.
ResNet. ResNet Communications, Inc., a Delaware corporation and subsidiary
of LodgeNet.
ResNet Business. ResNet's business of operating as a "private cable
operator" under applicable federal law, providing video on-demand, basic and
premium cable television programming, and other interactive, multi-media
entertainment and information services to subscribers in multiple dwelling
units with facilities that do not use any public right-of-way.
Restricted Shares. Restricted shares granted pursuant to the 1996 Plan.
Restriction Period. Period of time designated by the Committee at the time
of any Award of Restricted Shares, which must elapse before the Restricted
Shares will become vested.
Retained Distributions. Dividends and distributions made or declared with
respect to Restricted Shares before the end of the Restriction Period, other
than such dividends and other distributions designated by the Committee.
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SARs. Stock appreciation rights granted pursuant to the 1996 Plan.
Satellite Construction Agreement. Fixed-price satellite construction
agreement between Loral and Tempo dated as of February 22, 1990, pursuant to
which the Company has agreed to purchase the Company Satellites and has an
option to purchase up to three additional satellites.
Satellite No. 1. Company Satellite which has been completed and outfitted
with an antenna for the 82(degrees) W.L. orbital location.
Satellite No. 2. Company Satellite which has been completed except for the
installation of an antenna.
Satellite No. 3. Satellite which subject to completion of the Telesat
Transaction will be designated for the 119(degrees) W.L. orbital position
pursuant to Tempo's Construction Permit with the FCC, to be built by Loral
under the Satellite Construction Agreement and scheduled to be launched by May
1998.
Satellite Purchase Agreement. Satellite Purchase Agreement between Tempo and
Telesat, dated as of May 6, 1996, entered into in connection with the Telesat
Transaction.
Satellite Purchase Price. Purchase price payable by Telesat for each Company
Satellite, in accordance with the Satellite Purchase Agreement.
satellite receiver. See "IRD."
SBCA. Satellite Broadcasting and Communications Association.
SEC. Securities and Exchange Commission.
Securities Act. Securities Act of 1933, as amended.
Series A Common Stock. TCI Satellite Entertainment, Inc. Series A Common
Stock, $1.00 par value per share.
Series A Liberty Media Group Common Stock. Tele-Communications, Inc. Series
A Liberty Media Group Common Stock, $1.00 par value per share.
Series A TCI Group Common Stock. Tele-Communications, Inc. Series A TCI
Group Common Stock, $1.00 par value per share.
Series B Common Stock. TCI Satellite Entertainment, Inc. Series B Common
Stock, $1.00 par value per share.
Series B Liberty Media Group Common Stock. Tele-Communications, Inc. Series
B Liberty Media Group Common Stock, $1.00 par value per share.
Series B TCI Group Common Stock. Tele-Communications, Inc. Series B TCI
Group Common Stock, $1.00 par value per share.
Service. Internal Revenue Service.
set-top box. See "IRD."
Share Purchase Agreement. Agreement to be entered into by TCI and the
Company on or before the Distribution Date, to sell to each other from time to
time, at the then current market price, shares of Series A TCI Group Common
Stock and Series A Common Stock, respectively, as necessary to satisfy their
respective obligations (i) under Adjusted TCI Options and Add-on Company
Options held after the Distribution Date by
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their respective employees and nonemployee directors and (ii) in connection
with any required adjustments to the TCI Series D Preferred Stock and the
Convertible Notes due December 12, 2021 of TCI UA, Inc., as a result of the
Distribution.
State Decree. Consent decree entered in The States of New York, et al. v.
PRIMESTAR Partners, L.P., et al., 93 Civ. 3068-3907 (SDNY, 1994).
Stock Units. Awards of Series A Common Stock and other awards granted by the
Committee under the 1996 Plan that are valued in whole or in part by reference
to, or are otherwise based on, the value of the Series A Common Stock.
Tag-Along Agreement. Agreement dated as of February 8, 1990, originally
entered into by and among Cox Enterprises, Inc., Comcast, Continental,
Newhouse, Tempo, TCIC and TCI Development Corporation, a subsidiary of TCI.
Tandem SAR. SAR granted under the 1996 Plan to the holder of an Option with
respect to all or a portion of the shares of Series A Common Stock subject to
the related Option.
Tax Sharing Agreement. The Tax Sharing Agreement among TCI, TCIC and certain
other consolidated subsidiaries of TCI, as amended. In connection with the
Distribution, the Tax Sharing Agreement will be amended to provide that the
Company will be treated as if it had been a party to the Tax Sharing Agreement
effective July 1, 1995.
TCI. Tele-Communications, Inc., a Delaware corporation.
TCI 1994 Plan. Tele-Communications, Inc. 1994 Stock Incentive Plan.
TCI 1995 Plan. Tele-Communications, Inc. 1995 Stock Incentive Plan.
TCI 1996 Plan. Tele-Communications, Inc. 1996 Incentive Plan.
TCI Board. Board of Directors of TCI.
TCIC. TCI Communications, Inc., a Delaware corporation and the subsidiary of
TCI that owns and operates cable systems in the U.S., and its consolidated
subsidiaries.
TCIC Credit Facility. A credit facility, dated as of the Distribution Date,
that will provide for TCIC's commitment to make the TCIC Revolving Loans and
the Company's obligations with respect to the TCIC Revolving Loans and the
Company Note.
TCIC Revolving Loans. Loans to be made by TCIC from time to time pursuant to
the TCIC Credit Facility up to an aggregate outstanding principal amount of
$500,000,000.
TCI Group. TCI's businesses that are not attributed to the Liberty Media
Group.
TCI Group Common Stock. Series A TCI Group Common Stock and Series B TCI
Group Common Stock.
TCI Group Stockholders. Holders of record of TCI Group Common Stock.
TCI Intercompany Agreements. The Reorganization Agreement, the Fulfillment
Agreement, the Transition Services Agreement and the Stock Option Agreements.
TCI Options. Options to purchase shares of Series A TCI Group Common Stock.
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TCI Plan Committee. Committee of the TCI Board of Directors that administers
the TCI Plans.
TCI Plans. Various stock plans of TCI, other than the TCI 1992 Plan.
TCI SARs. Stock appreciation rights with respect to shares of Series A TCI
Group Common Stock.
TCI Series D Preferred Stock. TCI Series D Convertible Preferred Stock.
TCITV. TCI Technology Ventures, Inc., a Delaware corporation and a subsidiary
of TCI.
TCI UA 1. TCI UA 1, Inc., a Colorado corporation and a subsidiary of TCI.
TCI UA 1 Letter of Credit. Irrevocable transferable letter of credit issued
by Chemical Bank for the account of TCI UA 1, which supports the PRIMESTAR
Credit Facility.
Telesat. Telesat Canada, a Canadian corporation.
Telesat Transaction. Proposed transaction between the Company and Telesat,
which provides, among other things, for (i) the launch by Telesat of one or
both of the Company Satellites into the 82(degrees) W.L. orbital position, (ii)
the sale of the Company Satellites to Telesat pursuant to the Satellite
Purchase Agreement, and (iii) the resale by Telesat of 27 of the 32
transponders on the Company Satellites to the Company or a subsidiary pursuant
to the Operating Services Agreement.
Tempo. Tempo Satellite, Inc., an Oklahoma corporation and a direct, wholly
owned subsidiary of the Company.
Tempo Letter Agreements. Two letter agreements entered into by Tempo and
PRIMESTAR Partners in connection with the Tempo Option and certain related
matters.
Tempo Option. PRIMESTAR Partners' right and option, granted by Tempo under
the Option Agreement, upon exercise, to purchase or lease 100% of the capacity
of a DBS system to be built, launched and operated by Tempo pursuant to the
Construction Permit.
Time Warner. Time Warner, Inc.
Transition Services Agreement. Agreement between TCI and the Company,
pursuant to which TCI will provide to the Company certain services and other
benefits, including certain administrative and other services that were
provided to the Company by TCI prior to the Distribution.
transponder. The device on a communications satellite, composed of one or
more traveling wave tube amplifiers and related equipment, that receives and
transmits radio signals. For an analog signal, there is one transmitting
channel per transponder. With digital compression, one transponder can be
converted on average into five or more analog programming channels.
USSB. United States Satellite Broadcasting Corporation, a Minnesota
corporation.
UVSG. United Video Satellite Group, Inc., an Oklahoma corporation and a
consolidated subsidiary of TCI that is included in the TCI Group.
Voting Securities. The Series A Common Stock, the Series B Common Stock and
any series of Preferred Stock entitled to vote with the holders of Company
Common Stock generally upon all matters that may be submitted to a vote of
stockholders at any annual meeting or special meeting thereof.
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wireless cable. Any of a number of methods of distributing multichannel video
programming by land-based radio frequency transmissions, including MMDS and
LMDS.
W.L. West longitude. Satellite orbital positions are identified by their
position over the equator in degrees of longitude East or West of the zero
meridian.
WTCI. Western Tele-Communications, Inc., a Delaware corporation and a
subsidiary of TCIC.
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INDEX TO FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<S> <C>
TCI SATELLITE ENTERTAINMENT, INC.
Condensed Pro Forma Combined Financial Statements, June 30, 1996 (unau-
dited).................................................................. F-2
Condensed Pro Forma Combined Balance Sheet, June 30, 1996 (unaudited).... F-3
Condensed Pro Forma Combined Statement of Operations,
Six months ended June 30, 1996 (unaudited).............................. F-4
Year ended December 31, 1995 (unaudited)................................ F-5
Notes to Condensed Pro Forma Combined Financial Statements, June 30, 1996
(unaudited)............................................................. F-6
</TABLE>
HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<S> <C>
"TCI SATCO"
Audited Combined Financial Statements
Independent Auditors' Report............................................ F-10
Combined Balance Sheets, December 31, 1995 and 1994..................... F-11
Combined Statements of Operations, Years ended December 31, 1995, 1994
and 1993............................................................... F-12
Combined Statements of Parent's Investment, Years ended December 31,
1995, 1994 and 1993.................................................... F-13
Combined Statements of Cash Flows, Years ended December 31, 1995, 1994
and 1993............................................................... F-14
Notes to Combined Financial Statements, December 31, 1995, 1994 and
1993................................................................... F-15
Unaudited Combined Financial Statements
Combined Balance Sheets, June 30, 1996 and December 31, 1995............ F-34
Combined Statements of Operations, Six months ended June 30, 1996 and
1995................................................................... F-35
Combined Statements of Parent's Investment, Six months ended June 30,
1996................................................................... F-36
Combined Statements of Cash Flows, Six months ended June 30, 1996 and
1995................................................................... F-37
Notes to Combined Financial Statements, June 30, 1996................... F-38
</TABLE>
<TABLE>
<S> <C>
PRIMESTAR PARTNERS, L.P.
Audited Financial Statements
Report of Independent Accountants....................................... F-53
Balance Sheet, December 31, 1995 and 1994............................... F-54
Statement of Operations, December 31, 1995, 1994 and 1993............... F-55
Statement of Changes in Partners Capital, Years ended December 31, 1995,
1994 and 1993.......................................................... F-56
Statement of Cash Flows, Years ended December 31, 1995, 1994 and 1993... F-57
Notes to Financial Statements, December 31, 1995, 1994 and 1993......... F-58
</TABLE>
F-1
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
"TCI SATCO" is comprised of certain satellite television assets of TCI
Communications, Inc. ("TCIC"), a subsidiary of Tele-Communications, Inc.
("TCI"). Upon consummation of the spinoff transaction described in note 1 (the
"Distribution"), TCI Satellite Entertainment, Inc. ("TSEI") will own the
assets that comprise "TCI SATCO," which assets include (i) a 100% ownership
interest in "PRIMESTAR By TCI," the TCIC business that distributes the
PRIMESTAR(R) programming service to subscribers within specified areas of the
continental United States, (ii) an aggregate 20.86% ownership interest in
PRIMESTAR Partners, L.P. ("PRIMESTAR Partners"), (iii) a 100% ownership
interest in Tempo Satellite, Inc. ("Tempo"), and (iv) TCI's rights under
certain agreements with Telesat Canada ("Telesat").
In the following text, the "Company" may, as the context requires, refer to
"TCI SATCO" (prior to the completion of the Distribution), TSEI (subsequent to
the completion of the Distribution) or both. Additionally, unless the context
indicates otherwise, references to "TCI" and "TCIC" herein are to TCI and
TCIC, together with their respective consolidated subsidiaries (other than the
Company).
The following unaudited condensed pro forma combined balance sheet of the
Company, dated as of June 30, 1996, assumes that (i) the Distribution and (ii)
the "Reorganization Agreement" (see note 2), the "Fulfillment Agreement" (see
note 3), the "Transition Services Agreement" (see note 4) and the "Stock
Option Agreements" (see note 5), (collectively, the "TCI Intercompany
Agreements") were effective, as of such date.
The following unaudited condensed pro forma combined statements of operations
of the Company for the six months ended June 30, 1996 and the year ended
December 31, 1995 assume that the Distribution and the TCI Intercompany
Agreements were effective, as of January 1, 1995.
The unaudited pro forma results do not purport to be indicative of the results
of operations that would have been obtained if the Distribution and the TCI
Intercompany Agreements were effective as of January 1, 1995. These condensed
pro forma combined financial statements of the Company should be read in
conjunction with the historical combined financial statements and the related
notes thereto of the Company.
F-2
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
CONDENSED PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
ASSETS
Cash, receivables and prepaids.......... $ 21,626 11,300 (7) 32,926
Investment in, and related advances to,
PRIMESTAR Partners..................... 28,847 -- 28,847
Property and equipment, net of
accumulated depreciation............... 1,000,669 -- 1,000,669
---------- -------- ---------
$1,051,142 11,300 1,062,442
========== ======== =========
LIABILITIES AND EQUITY
Payables, accruals and other operating
liabilities............................ $ 81,310 -- 81,310
Due to PRIMESTAR Partners............... 386,219 -- 386,219
Company Note............................ -- 250,000 (6) 250,000
Stock compensation obligation........... -- 39,500 (7) 39,500
---------- -------- ---------
Total liabilities................... 467,529 289,500 757,029
---------- -------- ---------
Equity:
Series A Common Stock.................. -- 58,437 (8) 58,437
Series B Common Stock.................. -- 8,468 (8) 8,468
Additional paid-in capital............. -- 472,101 (6) 376,996
(28,200)(7)
(66,905)(8)
Accumulated deficit.................... (138,488) -- (138,488)
Due to TCIC............................ 722,101 (722,101)(6) --
---------- -------- ---------
Total equity........................ 583,613 (278,200) 305,413
---------- -------- ---------
$1,051,142 11,300 1,062,442
========== ======== =========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-3
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
------------------------------------
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue............................. $ 193,647 -- 193,647
Operating, selling, general and ad-
ministrative expenses.............. (186,625) 4,893 (9) (186,489)
(4,757)(10)
Stock compensation expense.......... -- (1,447)(11) (1,447)
Depreciation........................ (83,230) (12,930)(12) (96,160)
--------- ------- ---------
Operating Loss.................... (76,208) (14,241) (90,449)
Interest expense.................... -- (12,500)(13) (12,500)
Share of losses of PRIMESTAR Part-
ners............................... (1,446) -- (1,446)
Other, net.......................... 193 -- 193
--------- ------- ---------
Loss before income taxes.......... (77,461) (26,741) (104,202)
Income tax benefit.................. 25,073 10,696 (14) 35,769
--------- ------- ---------
Net loss.......................... $ (52,388) (16,045) (68,433)
========= ======= =========
Pro forma net loss per share........ $ (1.02)(15)
=========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-4
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------
COMPANY PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue............................... $208,902 -- 208,902
Operating, selling, general and admin-
istrative expenses................... (214,116) 12,096 (9) (206,304)
(4,284)(10)
Stock compensation expense............ -- (5,151)(11) (5,151)
Depreciation.......................... (68,233) (7,895)(12) (76,128)
-------- ------- --------
Operating Loss...................... (73,447) (5,234) (78,681)
Interest expense...................... -- (25,000)(13) (25,000)
Share of losses of PRIMESTAR Part-
ners................................. (8,969) -- (8,969)
Other, net............................ 306 -- 306
-------- ------- --------
Loss before income taxes............ (82,110) (30,234) (112,344)
Income tax benefit.................... 27,208 12,094 (14) 39,302
-------- ------- --------
Net loss............................ $(54,902) (18,140) (73,042)
======== ======= ========
Pro forma net loss per share.......... $ (1.09)(15)
========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-5
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
(1) On June 17, 1996, the Board of Directors of TCI (the "TCI Board")
announced its intention to spinoff all the capital stock of the Company to
the holders of Tele-Communications, Inc. Series A TCI Group Common Stock
(the "Series A TCI Group Common Stock") and Tele-Communications, Inc.
Series B TCI Group Common Stock (the "Series B TCI Group Common Stock"
and, together with the Series A TCI Group Common Stock, the "TCI Group
Common Stock"). The spinoff will be effected as a distribution by TCI to
holders of its TCI Group Common Stock of shares of the Series A Common
Stock of the Company (the "Series A Common Stock") and Series B Common
Stock of the Company (the "Series B Common Stock"). The Distribution will
not involve the payment of any consideration by the holders of TCI Group
Common Stock (such holders, the "TCI Group Stockholders"), and is intended
to qualify as a tax-free spinoff. The Distribution is expected to occur
during the fourth quarter of 1996, on a date (the "Distribution Date") to
be determined by the TCI Board, and will be made as a dividend to holders
of TCI Group Common Stock of record as of the close of business on a
record date (the "Record Date") to be determined by the TCI Board.
Stockholders of record of TCI Group Common Stock on the Record Date will
receive one share of Series A Common Stock for each ten shares of Series A
TCI Group Common Stock owned of record at the close of business on the
Record Date and one share of Series B Common Stock for each ten shares of
Series B TCI Group Common Stock owned of record as of the close of business
on the Record Date. Fractional shares will not be issued. Fractions of one-
half or greater of a share will be rounded up and fractions of less than
one-half of a share will be rounded down to the nearest whole number of
shares of Series A Common Stock and Series B Common Stock.
(2) The "Reorganization Agreement" will provide for, among other things, the
transfer to the Company of the assets of TCI SATCO, and for the assumption
by the Company of related liabilities. No consideration will be payable by
the Company for these transfers, except that two subsidiaries of the
Company will purchase TCIC's partnership interests in PRIMESTAR Partners
for consideration payable by delivery of promissory notes issued by such
subsidiaries, which notes will be assumed by TCI in connection with the
Distribution, in the form of a capital contribution to the Company. The
Reorganization Agreement will also provide for certain cross-indemnities
designed to make the Company financially responsible for all liabilities
relating to the digital satellite business conducted by TCI prior to the
Distribution, as well as for all liabilities incurred by the Company after
the Distribution, and to make TCI financially responsible for all
potential liabilities of the Company which are not related to the digital
satellite business, including, for example, liabilities arising as a
result of the Company being a subsidiary of TCI.
The Reorganization Agreement also will provide that, prior to the
Distribution, the Company will issue to TCIC a promissory note (the
"Company Note"), in the principal amount of $250,000,000, representing a
portion of the Company's intercompany balance owed to TCIC on such date.
The Company Note will bear interest at the rate of 10.0% per annum,
compounded semi-annually. The outstanding principal and accrued interest
under the Company Note will be due and payable on September 30, 2001.
However, the Company will be required to use its best efforts to refinance
the Company Note as soon as possible following the Distribution. Pursuant
to the Reorganization Agreement, the remainder of the Company's
intercompany balance owed to TCIC on the Distribution Date will be assumed
by TCI in the form of a capital contribution to the Company. In addition,
the Company will assume TCI's obligations under options to be granted on
the Distribution Date to certain key employees of TCI (who are not
employees of the Company) representing, in aggregate, 2.5% of the shares of
Company Common Stock issued and outstanding on the Distribution Date, after
giving effect to the Distribution. See note 5.
F-6
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(3) TCIC historically has provided the Company with certain customer
fulfillment services. Charges for such services have been allocated to the
Company by TCIC based on scheduled rates. Pursuant to the "Fulfillment
Agreement," TCIC will continue to provide fulfillment services to the
Company following the Distribution with respect to customers of the
PRIMESTAR(R) medium power service. Such services will include
installation, maintenance, retrieval, inventory management and other
customer fulfillment services. The Fulfillment Agreement, which will
become effective on the first day of the month following the Distribution
Date, provides for, among other matters, (i) the responsibilities of TCIC
with respect to fulfillment services, including performance standards and
penalties for non-performance, (ii) TCIC's fulfillment sites to be
connected to the billing and information systems used by the Company,
allowing for on-line scheduling and dispatch of installation and other
service calls, and (iii) scheduled rates to be charged to the Company for
the various customer fulfillment services to be provided by TCIC. The
Company retains sole control under the Fulfillment Agreement to establish
the retail prices and other terms and conditions on which installation and
other services will be provided to the Company's customers. The
Fulfillment Agreement also provides that, during the term of the
Fulfillment Agreement, TCIC will not provide fulfillment services to any
other wireless or other similar or competitive provider or distributor of
television programming services (other than traditional cable). The
Fulfillment Agreement will have an initial term of two years, and is
terminable, on 180 days notice to TCIC, by the Company at any time during
the first six months following the Distribution Date.
There can be no assurance that the terms of the Fulfillment Agreement are
not more or less favorable than those which could be obtained from
unaffiliated third parties, or that comparable services could be obtained
by the Company from third parties on any terms if the Fulfillment Agreement
is terminated. The cost to the Company of the services provided by TCIC
under the Fulfillment Agreement will exceed the standard charges that,
historically, have been allocated to the Company for such services,
reflecting in part the value to the Company, as determined by Company
management, of the performance standards, exclusivity, termination right
and certain other provisions included in the Fulfillment Agreement.
Installation charges from TCIC include direct and indirect costs of
performing installations. The Company has capitalized a portion of such
charges based upon amounts charged by unaffiliated third parties to perform
similar services. Following the Distribution, the Company will capitalize
the full amount of installation fees paid to TCIC pursuant to the
Fulfillment Agreement. In this regard, the installation charges allocated
to the Company by TCIC aggregated $28,212,000 and $69,154,000 during the
six months ended June 30, 1996 and the year ended December 31, 1995,
respectively. If the Fulfillment Agreement had been in effect on January 1,
1995, the estimated installation fees payable by the Company to TCIC would
have been $37,177,000 and $91,021,000 during the six months ended June 30,
1996 and the year ended December 31, 1995, respectively. The amount payable
in future periods by the Company to TCIC under the Fulfillment Agreement
will be dependent upon the level of fulfillment services provided by TCIC
to the Company.
(4) Pursuant to the Transition Services Agreement between TCI and the Company,
following the Distribution, TCI will provide to the Company certain
services and other benefits, including administrative and other services
that were provided to the Company prior to the Distribution. Pursuant to
the Transition Services Agreement, TCI has also agreed to provide the
Company with certain most-favored-customer rights to programming services
that TCI or a wholly owned subsidiary of TCI may own in the future and
access to any volume discounts that may be available to TCI for purchase
of home satellite dishes, satellite receivers and other equipment. The
Company does not presently purchase programming from SSI and no assurance
can be given that the Company will, in the future, purchase programming
from SSI. As compensation for
F-7
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
the services rendered and for the benefits made available to the Company
pursuant to the Transition Services Agreement, the Company will pay TCI a
monthly fee of $1.50 per qualified subscribing household or other customer
unit (regardless of the number of satellite receivers), commencing with
the month of January 1997, up to a maximum of $3 million per month, and
reimburse TCI quarterly for direct, out-of-pocket expenses to third
parties. The Transition Services Agreement will continue in effect until
the close of business on December 31, 1999, and will be renewed
automatically for successive one-year periods thereafter, unless earlier
terminated by (i) either party at the end of the initial term or the then
current renewal term, as applicable, on not less than 180 days' prior
written notice to the other party, (ii) TCI upon written notice to the
Company following certain changes in control of the Company, and (iii)
either party if the other party is the subject of certain bankruptcy or
insolvency-related events.
(5) In June 1996, the TCI Board authorized TCI to permit certain of its
executive officers to acquire equity interests in certain of TCI's
subsidiaries. In connection therewith, the TCI Board approved the
acquisition by each of two executive officers of TCI who are not employees
of the Company (the "TCI Officers"), of 1.0% of the net equity of the
Company. The TCI Board also approved the acquisition by an executive
officer of TCIC who is also the chief executive officer and a director of
the Company (the "Company Officer"), of 1.0% of the net equity of the
Company and the acquisition by an executive officer of a TCI subsidiary
who is also a director, but not an employee, of the Company (the "TCI
Subsidiary Officer"), of 0.5% of the net equity of the Company. The TCI
Board determined to structure such transactions as grants by the Company
to such persons of options to purchase shares of Series A Common Stock
representing 1.0% (in the case of each of the TCI Officers and the Company
Officer) and 0.5% (in the case of the TCI Subsidiary Officer) of the
shares of Series A Common Stock and Series B Common Stock issued and
outstanding on the Distribution Date, determined immediately after giving
effect to the Distribution, but before giving effect to any exercise of
such options. The aggregate exercise price for each such option is equal
to 1.0% (in the case of each of the TCI Officers and the Company Officer)
and 0.5% (in the case of the TCI Subsidiary Officer) of TCI's Net
Investment as of the first to occur of the Distribution Date and the date
on which such option first becomes exercisable, but excluding any portion
of TCI's Net Investment that as of such date is represented by a
promissory note or other evidence of indebtedness from the Company to TCI.
TCI's Net Investment is defined for this purpose as the cumulative amount
invested by TCI and its predecessor in the Company and its predecessors
prior to and including the applicable date of determination, less the
aggregate amount of all dividends and distributions made by the Company
and its predecessors to TCI and its predecessor prior to and including
such date. The options will be granted on the Distribution Date, will vest
in 20% cumulative increments on each of the first five anniversaries of
February 1, 1996, and will be exercisable for up to ten years following
February 1, 1996. Pursuant to the Reorganization Agreement, and (in the
case of the TCI Officers and the TCI Subsidiary Officer) in partial
consideration for the capital contribution to be made by TCI to the
Company in connection with the Distribution, the Company has agreed,
effective as of the Distribution Date, to bear all obligations under such
options and to enter into stock option agreements with respect to such
stock options (collectively, the "Stock Option Agreements") with each of
the TCI Officers, the Company Officer and the TCI Subsidiary Officer. See
note 2.
(6) Represents the issuance of the Company Note in satisfaction of
$250,000,000 of the intercompany balance owed to TCIC. The excess of the
remaining intercompany balance over the stock compensation obligation
described in notes 5 and 7 is reflected as a contribution to additional
paid-in capital. See note 2.
(7) Represents the estimated stock compensation obligation associated with the
Stock Option Agreements. Such estimated obligation is based upon
preliminary estimates of (i) the market value of the shares
F-8
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
underlying the Stock Option Agreements and (ii) the exercise price that
would have been calculated if the stock options evidenced by the Stock
Option Agreements were granted on June 30, 1996. Accordingly, such
estimated obligation is subject to adjustment upon the determination of
the actual market value and exercise price on the Distribution Date (the
date of grant). The estimated stock compensation obligation includes a
$28,200,000 obligation with respect to the TCI Officers and the TCI
Subsidiary Officer, and a $11,300,000 obligation with respect to the
Company Officer. The recognition of the estimated stock compensation
obligation with respect to (i) the TCI Officers and the TCI Subsidiary
Officer gives rise to a decrease in TCI's capital contribution to the
Company, (ii) the Company Officer gives rise to deferred stock
compensation expense that will be amortized over the five-year vesting
period set forth in the Stock Option Agreements. See notes 5 and 11.
(8) Reflects the issuance of Series A Common Stock and Series B Common Stock
pursuant to the Distribution. The number of shares reflected in the
accompanying condensed pro forma combined balance sheet was calculated by
applying the one-for-ten distribution ratio to the respective number of
issued and outstanding Series A TCI Group Common Stock and Series B TCI
Group Common Stock at June 30, 1996 (after elimination of shares held by
subsidiaries of TCI).
(9) Eliminates the portion of the installation fees allocated to the Company
by TCIC that was not capitalized in the Company's historical combined
financial statements. See note 3.
(10) Represents the estimated additional charges that would have been incurred
by the Company assuming the Transition Services Agreement had been
effective on January 1, 1995. See note 4.
(11) Represents estimated compensation expense resulting from the vesting of
the stock options that were assumed to be granted to the Company Officer
on January 1, 1995 pursuant to the Stock Option Agreements. See notes 5
and 7.
(12) Represents the estimated additional depreciation expense that would have
been incurred by the Company assuming (i) the Fulfillment Agreement had
been effective on January 1, 1995 and (ii) the Company had capitalized
all installation fees paid to TCIC under the Fulfillment Agreement. See
note 3.
(13) Represents assumed interest expense on the Company Note. The pro forma
adjustment has been calculated using an interest rate of 10% per annum,
the rate that interest will accrue on borrowings under the Company Note.
See note 2.
(14) Represents the estimated income tax effect of the pro forma adjustments.
(15) Represents pro forma loss per share assuming 66,904,582 weighted average
shares of the Company were outstanding during the six months ended June
30, 1996 and the year ended December 31, 1995. Such weighted average
shares represent the number of shares that would have been issued by the
Company if the Distribution had occurred on June 30, 1996.
F-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
TCI Communications, Inc.:
We have audited the accompanying combined balance sheets of "TCI SATCO" (a
combination of certain satellite television assets of TCI Communications,
Inc., as defined in note 1) as of December 31, 1995 and 1994, and the related
combined statements of operations, parent's investment, and cash flows for
each of the years in the three-year period ended December 31, 1995. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of "TCI SATCO" as of
December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1995,
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
October 21, 1996
F-10
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C>
ASSETS
Cash................................................... $ 1,801 --
Accounts receivable.................................... 29,192 4,103
Less allowance for doubtful accounts................... 4,819 1,589
---------- ---------
24,373 2,514
---------- ---------
Prepaid expenses....................................... 86 --
Investment in, and related advances to, PRIMESTAR Part-
ners L.P., ("PRIMESTAR Partners") (note 5)............ 17,963 9,793
Property and equipment, at cost:
Satellite reception systems.......................... 539,843 131,742
Support equipment.................................... 12,395 425
Cost of satellites under construction (note 6)....... 382,900 278,772
---------- ---------
935,138 410,939
Less accumulated depreciation........................ 63,250 17,727
---------- ---------
871,888 393,212
---------- ---------
$ 916,111 405,519
========== =========
LIABILITIES AND PARENT'S INVESTMENT
Accounts payable....................................... $ 11,378 1,168
Accrued charges from PRIMESTAR Partners (note 5)....... 26,420 4,900
Other accrued expenses................................. 11,484 1,078
Subscriber advance payments............................ 13,243 1,764
Due to PRIMESTAR Partners (note 6)..................... 382,900 278,772
---------- ---------
Total liabilities.................................. 445,425 287,682
---------- ---------
Parent's investment:
Accumulated deficit.................................. (86,100) (31,198)
Due to TCI Communications, Inc. ("TCIC") (notes 2 and
8).................................................. 556,786 149,035
---------- ---------
Total parent's investment.......................... 470,686 117,837
---------- ---------
Commitments and contingencies (notes 2, 5, 6, 8, 9 and
10)
$ 916,111 405,519
========== =========
</TABLE>
See accompanying notes to combined financial statements.
F-11
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- ------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue:
Programming and equipment rental.................. $133,688 18,641 9,075
Installation...................................... 75,214 11,638 2,604
-------- ------- ------
208,902 30,279 11,679
-------- ------- ------
Operating costs and expenses:
Programming and other charges from PRIMESTAR Part-
ners (note 5).................................. 78,250 11,632 4,445
Other operating:
TCIC (note 8)................................... 15,916 4,368 1,577
Other........................................... 1,884 -- --
Selling, general and administrative:
TCIC (note 8)................................... 7,817 1,080 795
Other........................................... 110,249 8,027 252
Depreciation...................................... 68,233 18,903 6,513
-------- ------- ------
282,349 44,010 13,582
-------- ------- ------
Operating loss................................ (73,447) (13,731) (1,903)
Other income (expense):
Share of losses of PRIMESTAR Partners (note 5).... (8,969) (11,722) (5,524)
Other, net........................................ 306 306 88
-------- ------- ------
(8,663) (11,416) (5,436)
-------- ------- ------
Loss before income taxes...................... (82,110) (25,147) (7,339)
Income tax benefit (note 7)......................... 27,208 9,371 3,403
-------- ------- ------
Net loss...................................... $(54,902) (15,776) (3,936)
======== ======= ======
</TABLE>
See accompanying notes to combined financial statements.
F-12
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF PARENT'S INVESTMENT
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED DUE TO PARENT'S
DEFICIT TCI INVESTMENT
----------- ------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Balance at January 1, 1993..................... $(11,486) 27,283 15,797
Net loss..................................... (3,936) -- (3,936)
Allocation of TCIC expenses.................. -- 2,372 2,372
Allocation of TCIC installation costs........ -- 4,511 4,511
Intercompany income tax allocation........... -- (3,403) (3,403)
Net cash transfers from TCIC................. -- 27,166 27,166
-------- ------- -------
Balance at December 31, 1993................... (15,422) 57,929 42,507
Net loss..................................... (15,776) -- (15,776)
Allocation of TCIC expenses.................. -- 5,448 5,448
Allocation of TCIC installation costs........ -- 15,369 15,369
Intercompany income tax allocation........... -- (9,371) (9,371)
Net cash transfers from TCIC................. -- 79,660 79,660
-------- ------- -------
Balance at December 31, 1994................... (31,198) 149,035 117,837
Net loss..................................... (54,902) -- (54,902)
Allocation of TCIC expenses.................. -- 23,733 23,733
Allocation of TCIC installation costs........ -- 57,058 57,058
Intercompany income tax allocation........... -- (35,735) (35,735)
Recognition of deferred tax assets in
connection with intercompany transfer of
certain property and equipment.............. -- 8,527 8,527
Net cash transfers from TCIC................. -- 354,168 354,168
-------- ------- -------
Balance at December 31, 1995................... $(86,100) 556,786 470,686
======== ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-13
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- --------
AMOUNTS IN THOUSANDS
(SEE NOTE 4)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $ (54,902) (15,776) (3,936)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation.................................. 68,233 18,903 6,513
Share of losses of PRIMESTAR Partners......... 8,969 11,722 5,524
Deferred income tax expense................... 8,527 -- --
Other non-cash charges (credits).............. 901 (87) 449
Changes in operating assets and liabilities:
Change in receivables........................ (21,859) (1,809) (263)
Change in prepaids........................... (86) -- --
Change in accruals and payables.............. 42,136 5,624 764
Change in subscriber advance payments........ 11,479 1,304 172
--------- -------- --------
Net cash provided by operating activities... 63,398 19,881 9,223
--------- -------- --------
Cash flows from investing activities:
Capital expended for construction of satel-
lites......................................... (104,128) (207,608) (71,164)
Capital expended for property and equipment.... (442,781) (109,184) (14,881)
Additional investments in and advances to
PRIMESTAR Partners............................ (17,139) (32,082) (24,664)
Repayment of advances to PRIMESTAR Partners.... -- 30,192 --
--------- -------- --------
Net cash used in investing activities: (564,048) (318,682) (110,709)
--------- -------- --------
Cash flows from financing activities:
Increase in due to PRIMESTAR Partners.......... 104,128 207,608 71,164
Increase in due to TCIC........................ 398,323 91,193 30,197
--------- -------- --------
Net cash provided by financing activities... 502,451 298,801 101,361
--------- -------- --------
Net increase (decrease) in cash............. 1,801 -- (125)
Cash at beginning of period................. -- -- 125
--------- -------- --------
Cash at end of period....................... $ 1,801 -- --
========= ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-14
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) BASIS OF PRESENTATION
The accompanying combined financial statements of "TCI SATCO" represent a
combination of the historical financial information of certain satellite
television assets of TCIC, a subsidiary of Tele-Communications, Inc. ("TCI").
Upon consummation of the spinoff transaction described in note 2, TCI
Satellite Entertainment, Inc. ("TSEI") will own the assets that comprise "TCI
SATCO," which assets include (i) a 100% ownership interest in "PRIMESTAR By
TCI," the TCIC business that distributes the PRIMESTAR(R) programming service
to subscribers within specified areas of the continental United States, (ii)
an aggregate 20.86% ownership interest in PRIMESTAR Partners, (iii) a 100%
ownership interest in Tempo Satellite, Inc. ("Tempo"), and (iv) TCI's rights
under certain agreements with Telesat Canada ("Telesat").
Tempo holds a construction permit issued by the Federal Communications
Commission ("FCC") authorizing construction of a direct broadcast satellite
("DBS") system. Tempo is also a party to a construction agreement with Space
Systems/Loral, Inc. ("Loral"), pursuant to which Loral is currently
constructing two high power communications satellites (the "Company
Satellites"). PRIMESTAR Partners, which was formed as a limited partnership in
1990 by subsidiaries of TCIC, several other cable operators and General
Electric Company, broadcasts satellite entertainment services that are
delivered to the home through PRIMESTAR By TCI and certain other authorized
distributors.
In the following text, the "Company" may, as the context requires, refer to
"TCI SATCO" (prior to the completion of the spinoff transaction described in
note 2), TSEI and its consolidated subsidiaries (subsequent to the completion
of the spinoff transaction described in note 2) or both. Additionally, unless
the context indicates otherwise, references to "TCI" and "TCIC" herein are to
TCI and TCIC, together with their respective consolidated subsidiaries (other
than the Company).
All significant inter-entity transactions have been eliminated.
As further discussed in note 8, the accompanying combined statements of
operations include allocations of certain costs and expenses of TCI. Although
such allocations are not necessarily indicative of the costs that would have
been incurred by the Company on a stand-alone basis, management believes the
resulting allocated amounts are reasonable.
(2) SPINOFF TRANSACTION
On June 17, 1996, the Board of Directors of TCI (the "TCI Board") announced
its intention to spinoff all the capital stock of the Company to the holders
of Tele-Communications, Inc. Series A TCI Group Common Stock (the "Series A
TCI Group Common Stock") and Tele-Communications, Inc. Series B TCI Group
Common Stock (the "Series B TCI Group Common Stock" and, together with the
Series A TCI Group Common Stock, the "TCI Group Common Stock"). The spinoff
will be effected as a distribution (the "Distribution") by TCI to holders of
its TCI Group Common Stock of shares of Series A Common Stock of the Company
(the "Series A Common Stock") and Series B Common Stock of the Company (the
"Series B Common Stock"). The Distribution will not involve the payment of any
consideration by the holders of TCI Group Common Stock (such holders, the "TCI
Group Stockholders"), and is intended to qualify as a tax-free spinoff. The
Distribution is expected to occur in the fourth quarter of 1996, on a date
(the "Distribution Date") to be determined by the TCI Board, and will be made
as a dividend to holders of TCI Group Common Stock of record as of the close
of business on a record date (the "Record Date") to be determined by the TCI
Board.
F-15
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Stockholders of record of TCI Group Common Stock on the Record Date will
receive one share of Series A Common Stock for each ten shares of Series A TCI
Group Common Stock owned of record at the close of business on the Record Date
and one share of Series B Common Stock for each ten shares of Series B TCI
Group Common Stock owned of record as of the close of business on the Record
Date. Fractional shares will not be issued. Fractions of one-half or greater
of a share will be rounded up and fractions of less than one-half of a share
will be rounded down to the nearest whole number of shares of Series A Common
Stock and Series B Common Stock.
Following the Distribution, the Company and TCI will operate independently,
and neither will have any stock ownership, beneficial or otherwise, in the
other. For the purposes of governing certain of the ongoing relationships
between the Company and TCI after the Distribution, and to provide mechanisms
for an orderly transition, on or before the Distribution Date the Company and
TCI will enter into various agreements, including the "Reorganization
Agreement", the "Fulfillment Agreement", the "TCIC Credit Facility", the
"Transition Services Agreement," an amendment to TCI's existing "Tax Sharing
Agreement" and the "Indemnification Agreements."
Reorganization Agreement
The Reorganization Agreement will provide for, among other things, the
transfer to the Company of the assets of TCI SATCO, and for the assumption by
the Company of related liabilities. No consideration will be payable by the
Company for these transfers, except that two subsidiaries of the Company will
purchase TCIC's partnership interests in PRIMESTAR Partners for consideration
payable by delivery of promissory notes issued by such subsidiaries, which
promissory notes will be assumed by TCI on or before the Distribution Date, in
the form of a capital contribution to the Company. The Reorganization
Agreement will also provide for certain cross-indemnities designed to make the
Company financially responsible for all liabilities relating to the digital
satellite business conducted by TCI prior to the Distribution, as well as for
all liabilities incurred by the Company after the Distribution, and to make
TCI financially responsible for all potential liabilities of the Company which
are not related to the digital satellite business, including, for example,
liabilities arising as a result of the Company's having been a subsidiary of
TCI.
Pursuant to the Reorganization Agreement, on or before the Distribution
Date, the Company will issue to TCIC a promissory note (the "Company Note"),
in the principal amount of $250,000,000, representing a portion of the
Company's intercompany balance owed to TCIC on such date. See related
discussion below.
Pursuant to the Reorganization Agreement, the remainder of the Company's
intercompany balance owed to TCIC on the Distribution Date will be assumed by
TCI in the form of a capital contribution to the Company. In addition, the
Company will assume TCI's obligations under options to be granted on the
Distribution Date to certain key employees of TCI (who are not employees of
the Company) representing, in aggregate, 2.5% of the shares of Company Common
Stock issued and outstanding on the Distribution Date, after giving effect to
the Distribution. See related discussion below.
Fulfillment Agreement
TCIC historically has provided the Company with certain customer fulfillment
services for PRIMESTAR(R) customers enrolled by the Company's direct sales
force and National Call Center. Charges for such services have been allocated
to the Company by TCIC based on scheduled rates.
Pursuant to the Fulfillment Agreement entered into by TCIC and the Company,
TCIC will continue to provide fulfillment services to the Company following
the Distribution with respect to customers of the
F-16
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
PRIMESTAR(R) medium power service. Such services will include installation,
maintenance, retrieval, inventory management and other customer fulfillment
services. The Fulfillment Agreement, which will become effective on the first
day of the month following the Distribution Date. Among other matters, the
Fulfillment Agreement (i) sets forth the responsibilities of TCIC with respect
to fulfillment services, including performance standards and penalties for
non-performance, (ii) provides for TCIC's fulfillment sites to be connected to
the billing and information systems used by the Company, allowing for on-line
scheduling and dispatch of installation and other service calls, and (iii)
provides scheduled rates to be charged to the Company for the various customer
fulfillment services to be provided by TCIC. The Company retains sole control
under the Fulfillment Agreement to establish the retail prices and other terms
and conditions on which installation and other services will be provided to
the Company's customers. The Fulfillment Agreement also provides that, during
the term of the Fulfillment Agreement, TCIC will not provide fulfillment
services to any other wireless or other similar or competitive provider or
distributor of television programming services (other than traditional cable).
The Fulfillment Agreement will have an initial term of two years and is
terminable, on 180 days notice to TCIC, by the Company at any time during the
first six months following the Distribution Date.
There can be no assurance that the terms of the Fulfillment Agreement are
not more or less favorable than those which could be obtained from
unaffiliated third parties, or that comparable services could be obtained by
the Company from third parties on any terms if the Fulfillment Agreement is
terminated. The cost to the Company of the services provided by TCIC under the
Fulfillment Agreement will exceed the standard charges that, historically,
have been allocated to the Company for such services, reflecting in part the
value to the Company, as determined by Company management, of the performance
standards, exclusivity, termination right and certain other provisions
included in the Fulfillment Agreement. See notes 1 and 8.
TCIC Credit Facility
TCIC has agreed to make loans to the Company from time to time up to an
aggregate outstanding principal amount of $500,000,000 (the "TCIC Revolving
Loans"). The terms and conditions of the TCIC Revolving Loans and Company Note
will be provided for by a credit agreement, dated as of the Distribution Date,
between the Company and TCIC (the "TCIC Credit Facility"). The TCIC Revolving
Loans and the Company Note will bear interest at 10% per annum, compounded
semi-annually. Commitment fees equal to 3/8% of the average unborrowed
availability of TCIC's $500,000,000 commitment under the TCIC Credit Facility
will be payable to TCIC annually. Proceeds from the TCIC Revolving Loans may
be used to fund (i) working capital requirements, (ii) capital expenditures
contemplated by the October 1996 business plan of the Company, (iii) up to
$75,000,000 of other capital expenditures and investments and (iv) the
commitment fees payable under the TCIC Credit Facility. The TCIC Credit
Facility requires the Company to use its best efforts to obtain external debt
or equity financing after the Distribution Date. The TCIC Credit Facility
further provides for mandatory prepayment of the TCIC Revolving Loans and the
Company Note to the extent and in the amount that the Company has obtained
such external financing. Any such prepayment from the proceeds of external
financing is required to be applied first to the Company Note and then to
repay borrowings and correspondingly reduce the commitments under the TCIC
Credit Facility. The outstanding principal of the TCIC Revolving Loans and the
Company Note, together with accrued interest, will be due and payable on
September 30, 2001, the final maturity date of the TCIC Credit Facility,
whether or not sufficient external financing has then been obtained by the
Company.
Borrowings under the TCIC Credit Facility are subject to, among other
things, (a) the Company's representations and warranties being true and
correct on the date of borrowing, (b) the Company's being in compliance with
its covenants in the TCIC Credit Facility, (c) no default having occurred and
being continuing
F-17
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
on the borrowing date or being caused by such borrowing and (d) the Company's
being in compliance, in all material respects, with the terms and conditions
of the Indemnification Agreements, the Transition Services Agreement, the
Reorganization Agreement and the Fulfillment Agreement. The TCIC Credit
Facility sets forth the covenants the Company has agreed to comply with during
the term of the TCIC Credit Facility, including its covenants (i) not to sell,
transfer or otherwise dispose of any asset (other than sales of inventory in
the ordinary course of business), without the prior written consent of TCIC
(other than the sale of assets or securities of a subsidiary if the aggregate
consideration payable to the seller in respect of such sale is not less than
the fair market value of such assets), (ii) not to merge into or consolidate
or combine with any other person, without the prior written consent of TCIC,
(iii) not to declare or pay any dividend or make any distribution on its
capital stock (other than in common stock), or purchase, redeem or otherwise
acquire or retire for value any capital stock of the Company, (iv) to maintain
specified minimum numbers of qualified subscribers from December 31, 1996
through December 31, 1997, (v) not to incur indebtedness at any time prior to
and including December 31, 1997 that would exceed a specified amount per
qualified subscriber, (vi) to maintain specified leverage ratios from January
1, 1998 through September 30, 2001, (vii) to maintain specified minimum ratios
of annualized cash flow to annual interest expense, and (viii) to maintain a
specified minimum ratio of annualized cash flow to pro forma debt service.
Transition Services Agreement
Pursuant to the Transition Services Agreement between TCI and the Company,
following the Distribution, TCI will provide to the Company certain services
and other benefits, including certain administrative and other services that
were provided by TCI prior to the Distribution. Pursuant to the Transition
Services Agreement, TCI has also agreed to provide the Company with certain
most-favored-customer rights to programming services that TCI or a wholly
owned subsidiary of TCI may own in the future and access to any volume
discounts that may be available to TCI for purchase of home satellite dishes,
satellite receivers and other equipment. As compensation for the services
rendered and for the benefits made available to the Company pursuant to the
Transition Services Agreement, the Company will pay TCI a monthly fee of $1.50
per qualified subscribing household or other customer unit (regardless of the
number of satellite receivers), commencing with the month of January 1997, up
to a maximum of $3,000,000 per month, and reimburse TCI quarterly for direct,
out-of-pocket expenses incurred by TCI to third parties in providing the
services. The Transition Services Agreement will continue in effect until the
close of business on December 31, 1999, and will be renewed automatically for
successive one-year periods thereafter, unless earlier terminated by (i)
either party at the end of the initial term or the then current renewal term,
as applicable, on not less than 180 days' prior written notice to the other
party, (ii) TCI upon written notice to the Company following certain changes
in control of the Company, and (iii) either party if the other party is the
subject of certain bankruptcy or insolvency-related events.
Indemnification Agreements
On or before the Distribution Date, the Company will enter into
Indemnification Agreements (the "Indemnification Agreements") with TCIC, TCI
Technology Ventures, Inc. ("TCITV") and TCI UA 1, Inc. ("TCI UA 1"). The
Indemnification Agreement with TCIC will provide for the Company to reimburse
TCIC for any amounts drawn under an irrevocable transferable letter of credit
issued for the account of TCIC to support the Company's share of PRIMESTAR
Partners' obligations under an Amended and Restated Memorandum of Agreement,
effective as of October 18, 1996, between the Partnership and GE Americom,
with respect to PRIMESTAR Partners' use of transponders on a medium power
satellite ("GE-2" or the "Replacement Satellite"), to be launched by GE
Americom to replace the existing satellite used by PRIMESTAR Partners (the
"GE-2 Agreement"). The original drawable amount of such letter of credit is
$25,000,000, increasing to
F-18
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
$75,000,000 if PRIMESTAR Partners exercises its option under the GE-2
Agreement to extend the term of such agreement for the remainder of the useful
life of GE-2. See notes 5 and 9.
The Indemnification Agreement with TCITV will provide for the Company to
indemnify and hold harmless TCITV and certain related persons from and against
any losses, claims and liabilities arising out of certain agreements relating
to the proposed transaction with Telesat, which TCITV will assign to the
Company in connection with the Distribution. See note 6. The Indemnification
Agreement with TCI UA 1 will provide for the Company to reimburse TCI UA 1 for
any amounts drawn under an irrevocable transferable letter of credit issued
for the account of TCI UA 1 (the "TCI UA 1 Letter of Credit"), which supports
a credit facility (the "PRIMESTAR Credit Facility") that was obtained by
PRIMESTAR Partners to finance advances to Tempo for payments due in respect of
the construction of the Company Satellites, and that is supported by letters
of credit arranged for by affiliates of all but one of the partners of
PRIMESTAR Partners.
The TCIC and TCI UA 1 Indemnification Agreements further provide for the
Company to indemnify and hold harmless TCIC and TCI UA 1, respectively, and
certain related persons from and against any losses, claims, and liabilities
arising out of the respective letters of credit or any drawings thereunder.
The payment obligations of the Company to TCIC and TCI UA1 under such
Indemnification Agreements will be subordinated in right of payment with
respect to certain future obligations of the Company to financial
institutions.
Other Arrangements
In June 1996, the TCI Board authorized TCI to permit certain of its
executive officers to acquire equity interests in certain of TCI's
subsidiaries. In connection therewith, the TCI Board approved the acquisition
by each of two executive officers of TCI who are not employees of the Company
(the "TCI Officers"), of 1.0% of the net equity of the Company. The TCI Board
also approved the acquisition by an executive officer of TCIC who is also the
chief executive officer and a director of the Company (the "Company Officer"),
of 1.0% of the net equity of the Company and the acquisition by an executive
officer of a TCI subsidiary who is also a director, but not an employee, of
the Company (the "TCI Subsidiary Officer"), of 0.5% of the net equity of the
Company. The TCI Board determined to structure such transactions as grants by
the Company to such persons of options to purchase shares of Series A Common
Stock representing 1.0% (in the case of each of the TCI Officers and the
Company Officer) and 0.5% (in the case of the TCI Subsidiary Officer) of the
shares of Series A Common Stock and Series B Common Stock issued and
outstanding on the Distribution Date, determined immediately after giving
effect to the Distribution, but before giving effect to any exercise of such
options. The aggregate exercise price for each such option is equal to 1.0%
(in the case of each of the TCI Officers and the Company Officer) and 0.5% (in
the case of the TCI Subsidiary Officer) of TCI's Net Investment (as defined
below) as of the first to occur of the Distribution Date and the date on which
such option first becomes exercisable, but excluding any portion of TCI's Net
Investment that as of such date is represented by a promissory note or other
evidence of indebtedness from the Company to TCI. TCI's Net Investment is
defined for this purpose as the cumulative amount invested by TCI and its
predecessor in the Company and its predecessors prior to and including the
applicable date of determination, less the aggregate amount of all dividends
and distributions made by the Company and its predecessors to TCI and its
predecessor prior to and including such date. The options will be granted on
the Distribution Date, will vest in 20% cumulative increments on each of the
first five anniversaries of February 1, 1996, and will be exercisable for up
to ten years following February 1, 1996. Pursuant to the Reorganization
Agreement, and (in the case of the TCI Officers and the TCIC Subsidiary
Officer) in partial consideration for the capital contribution to be made by
TCI to the Company in connection with the Distribution, the Company has agreed
effective as of the Distribution Date to bear all obligations under such
option and to
F-19
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
enter into stock option agreements with respect to such stock options with each
of the TCI Officers, the Company Officer and the TCIC Subsidiary Officer.
In connection with the Distribution, TCI and the Company also will enter into
a "Share Purchase Agreement" to sell to each other from time to time, at the
then current market price, shares of Series A TCI Group Common Stock and Series
A Common Stock, respectively, as necessary to satisfy their respective
obligations after the Distribution Date under certain stock options and stock
appreciation rights held by their respective employees, and certain other
convertible securities. On or prior to the Distribution, the Company will also
enter into an amendment to TCI's existing "Tax Sharing Agreement." See note 7.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment in PRIMESTAR Partners
The Company uses the equity method to account for its investment in PRIMESTAR
Partners. Under this method, the investment, originally recorded at cost, is
adjusted to recognize the Company's share of the net earnings or losses of
PRIMESTAR Partners as they occur, rather than as dividends or other
distributions are received, limited to the extent of the Company's investment
in, and advances and commitments to, PRIMESTAR Partners. The Company's share of
net earnings or losses of PRIMESTAR Partners includes the amortization of the
difference between the Company's investment and its share of the net assets of
PRIMESTAR Partners.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed on a
straight-line basis using estimated useful lives of 4 to 6 years for satellite
reception systems and 3 to 10 years for support equipment. Satellite reception
systems include subscriber installation costs, which costs are depreciated over
the estimated average life of a subscriber (4 years). Any subscriber
installation costs that have not been fully depreciated at the time service to
a subscriber is terminated are charged to depreciation expense during the
period in which such termination occurs.
Installation charges from TCIC include direct and indirect costs of
performing installations. The Company has capitalized a portion of such charges
based upon amounts charged by unaffiliated third parties to perform similar
services.
Repairs and maintenance are charged to operations, and betterments and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such
property are charged to accumulated depreciation, and salvage, if any, is
credited thereto.
The cost of the Company Satellites under construction is comprised of amounts
paid by the Company pursuant to a fixed price construction contract. See note
6.
In March of 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("Statement No. 121"), effective for fiscal years beginning after December 15,
1995. Statement No. 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Statement No. 121 also addresses the accounting
for long-lived assets
F-20
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
that are expected to be disposed of. The Company adopted Statement No. 121
effective December 31, 1995. Such adoption did not have a significant effect on
the financial position or results of operations of the Company. In accordance
with Statement No. 121, the Company periodically reviews the carrying amount of
its long-lived assets to determine whether current events or circumstances
warrant adjustments to such carrying amounts. The Company considers historical
and expected future net operating losses to be its primary indicators of
potential impairment. Assets are grouped and evaluated for impairment at the
lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets ("Assets"). The Company
deems Assets to be impaired if the Company is unable to recover the carrying
value of its Assets over their expected remaining useful life through a
forecast of undiscounted future operating cash flows directly related to the
Assets. If Assets are deemed to be impaired, the loss is measured as the amount
by which the carrying amount of the Assets exceeds their fair values. TCI SATCO
generally measures fair value by considering sales prices for similar assets or
by discounting estimated future cash flows. Considerable management judgment is
necessary to estimate discounted future cash flows. Accordingly, actual results
could vary significantly from such estimates.
Revenue Recognition
Monthly programming and equipment rental revenue is recognized in the period
that services are delivered. Installation revenue is recognized in the period
the installation services are provided to the extent of direct selling costs.
To date, direct selling costs have exceeded installation revenue.
Marketing and Direct Selling Costs
Marketing and direct selling costs are expensed as incurred.
Residual Sales Commissions
Residual sales commissions, which become payable upon the collection of
programming revenue from certain subscribers, are expensed during the period in
which such commissions become payable. See note 9.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("Statement No. 123") was issued by the FASB in October
1995. Statement No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans as well as transactions
in which an entity issues its equity instruments to acquire goods or services
from non-employees. The disclosures required by Statement No. 123, to the
extent applicable, will be included in the notes to future financial
statements.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(4) SUPPLEMENTAL DISCLOSURES TO COMBINED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes was not material during the years
ended December 31, 1995, 1994 and 1993.
F-21
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
With the exception of certain non-cash transactions described in notes 7 and
8, transactions effected through the intercompany account with TCIC have been
considered to be constructive cash receipts and payments for purposes of the
accompanying combined statements of cash flows.
(5) INVESTMENT IN PRIMESTAR PARTNERS
Summarized unaudited financial information for PRIMESTAR Partners is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
-------- -------
<S> <C> <C>
FINANCIAL POSITION
Current assets.............................................. $ 72,638 39,756
Property and equipment, net................................. 9,990 7,703
Cost of satellites under construction....................... 419,256 289,607
Other assets, net........................................... 14,078 7,009
-------- -------
Total assets.............................................. $515,962 344,075
======== =======
Current liabilities......................................... $ 37,911 17,081
PRIMESTAR Credit Facility................................... 419,000 290,000
Other liabilities........................................... 7,210 11,178
Partners' capital........................................... 51,841 25,816
-------- -------
Total liabilities and partners' capital................... $515,962 344,075
======== =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1994 1993
--------- ------- -------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Revenue....................................... $ 180,595 27,841 10,861
Operating, selling, general and administrative
expenses..................................... (216,100) (78,175) (38,433)
Depreciation and amortization................. (2,890) (2,700) (1,849)
--------- ------- -------
Operating loss.............................. (38,395) (53,034) (29,421)
Other, net.................................... (3,642) (2,682) 131
--------- ------- -------
Net loss.................................... $ (42,037) (55,716) (29,290)
========= ======= =======
</TABLE>
The PRIMESTAR Credit Facility matures on June 30, 1997 and borrowings
thereunder are collateralized by letters of credit issued by affiliates of all
but one of the partners. See notes 6 and 9.
PRIMESTAR Partners currently broadcasts from Satcom K-1 ("K-1"), a medium
power satellite that is nearing the end of its operational life. Although the
Company believes that the Replacement Satellite will be successfully deployed
prior to the expiration of the operational life of K-1, such deployment is
dependent on a number of factors that are outside of the Company's control, and
no assurance can be given as to the successful deployment of the Replacement
Satellite. The failure to deploy a fully operational satellite by the end of K-
1's operational life (or the operational life of any temporary in-orbit
replacement that might be available) could have a material adverse effect on
both the Company and PRIMESTAR Partners.
PRIMESTAR Partners is obligated to make certain minimum lease payments
throughout the remaining operational life of K-1. Pursuant to the GE-2
Agreement, it is anticipated that PRIMESTAR Partners will be
F-22
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
required to make minimum lease payments for an initial term of four years from
the date of commercial operation, extendible, at the option of PRIMESTAR
Partners exercised prior to the later of December 31, 1996 and 45 days after
written notice to PRIMESTAR Partners that delivery of the Replacement Satellite
has occurred, for the remainder of the operational life of such Replacement
Satellite (the "End-Of-Life Option"). See notes 2 and 9.
PRIMESTAR Partners provides programming services to the Company and other
authorized distributors in exchange for a fee based upon the number of
subscribers receiving the respective programming services. In addition,
PRIMESTAR Partners arranges for satellite capacity and uplink services, and
provides national marketing and administrative support services in exchange for
a separate authorization fee. In April 1994, PRIMESTAR Partners began to
separately identify charges which relate to programming services from those
which relate to other items. During the year ended December 31, 1995, the
charges from PRIMESTAR Partners included approximately $53,006,000 for
programming services and $25,244,000 for other items.
Under the PRIMESTAR Partners limited partnership agreement, the Company has
agreed to fund its share of any capital contributions and/or loans to PRIMESTAR
Partners that might be agreed upon from time to time by the partners of
PRIMESTAR Partners. Additionally, as a general partner of PRIMESTAR Partners,
the Company is liable as a matter of partnership law for all debts of PRIMESTAR
Partners in the event the liabilities of PRIMESTAR Partners were to exceed its
assets. PRIMESTAR Partners has contingent liabilities related to legal and
other matters arising in the ordinary course of business. Management of
PRIMESTAR Partners is unable at this time to assess the impact, if any, of such
matters on PRIMESTAR Partners' results of operations, financial position, or
cash flows.
(6) SATELLITES UNDER CONSTRUCTION
The Company, through Tempo, holds a "Construction Permit" issued by the FCC
authorizing construction of a DBS system consisting of two or more satellites
delivering DBS service in 11 frequencies at the 119(degrees) W.L. orbital
position and 11 frequencies at the 166(degrees) W.L. orbital position. Tempo is
also a party to the Satellite Construction Agreement with Loral, pursuant to
which Tempo has agreed to purchase the Company Satellites at a fixed contract
price of $487,159,500, and has an option to purchase up to three additional
satellites. The cost of constructing the Company Satellites is reflected in
"Cost of satellites under construction" in the accompanying combined balance
sheets. The Company is currently pursuing two parallel strategies for deploying
the Company Satellites.
Telesat Transaction.
In May 1996, subject to both American and Canadian regulatory approvals, the
Company, through Tempo, entered into agreements for the proposed arrangement
with Telesat to launch one or both of the Company Satellites into the
82(degrees) W.L. orbital position (the "Telesat Transaction"). The 82(degrees)
W.L. orbital position is a high power direct broadcast satellite slot allocated
by international agreement to Canada. The Telesat Transaction, if consummated,
provides that (i) the Company will sell the Company Satellites to Telesat in
accordance with the Satellite Purchase Agreement dated as of May 6, 1996 (the
"Satellite Purchase Agreement") between Tempo and Telesat and (ii) Telesat will
simultaneously resell 27 of the 32 transponders on the Company Satellites to
the Company, in accordance with the "Operating Services Agreement" between
Telesat and TCI Technology Ventures, Inc. ("TCITV"), a subsidiary of TCI, which
agreement will be assigned by TCITV to a subsidiary of the Company prior to the
Distribution. It is expected that Western Tele-Communications, Inc. ("WTCI"), a
subsidiary of TCIC, would provide uplinking and compression services in
connection with any DBS service to be operated using the transponders to be
purchased from Telesat.
F-23
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The purchase price (the "Satellite Purchase Price") payable by Telesat for
each Company Satellite if the Telesat Transaction is consummated is an amount
equal to the total cost of constructing, launching and placing into orbit such
Company Satellite, including capitalized interest and other financing costs
relating thereto. At the closing of the sale of each Company Satellite, in
accordance with the Operating Services Agreement, a subsidiary of the Company,
by assignment from TCITV, will purchase 27 of the 32 transponders on such
Company Satellite, for an initial payment equal to one-half of 27/32nds of the
Satellite Purchase Price for such Company Satellite, which payment will be
offset against the Satellite Purchase Price to be paid at that closing by
Telesat (and the balance of the Satellite Purchase Price remitted by the
Company to the Partnership to repay advances under the Tempo Letter Agreements
described below). Thereafter, the Company will pay Telesat a quarterly
operating fee for use of the transponders, including charges for in-orbit
insurance and tracking, telemetry and control of the Company Satellites. The
aggregate operating fee per quarter is fixed for the first 48 quarters,
subject to adjustment based on the actual Satellite Purchase Price for the
Company Satellites. If the Company continues to use the transponders after 48
quarterly payments have been made, the Company will make quarterly payments to
Telesat at a rate equal to about one-fourth of the previous quarterly
payments.
The proposed Telesat Transaction is subject to the approval of U.S. and
Canadian regulatory authorities. No assurance can be given that such
regulatory approval will be obtained or will be obtained on terms satisfactory
to the Company. On March 26, 1996, WTCI filed an application with the FCC for
authorization to construct and operate an earth station to uplink video
programming to the Company Satellites that would be launched into 82(degrees)
W.L. pursuant to the Telesat Transaction. On July 1, 1996, four cabinet-level
departments of the executive branch of the U.S. government filed the Executive
Branch Letter with the FCC recommending that the FCC treat the application as
premature and raising concerns regarding the application relating to
international agreement obligations, Canadian content restrictions, Canadian
licensing restrictions and domestic competition policy. On July 15, 1996, the
FCC dismissed WTCI's application, without prejudice, on the ground that the
application was premature because Canada has not yet issued licenses to
Telesat, which will own and operate the satellite containing the Company's
transponders to which WTCI will uplink. The FCC's order expressly did not
address any of the substantive issues raised by WTCI's application or by the
various petitions to deny WTCI's application that had been received from the
Company's competitors. The FCC indicated, however, that if WTCI refiled its
application, it would take into account concerns raised by the Executive
Branch Letter with respect to the application.
On August 14, 1996, WTCI filed a petition seeking reconsideration on the
ground that, although a formal license has not been issued, Industry Canada
has in fact issued all the pre-launch authority it customarily grants to
satellite applicants and that Telesat has received from Industry Canada its
standard support in principle for its proposal. In addition, WTCI noted that
none of the concerns raised by the Executive Branch Letter should impede grant
of WTCI's application. There can be no assurance, however, that the FCC will
respond favorably to the petition. Furthermore, although the Company believes
that WTCI's proposal is in the public interest and fully consistent with
applicable FCC rules and policies (as well as applicable treaties and
international agreements), there can be no assurance that the FCC will not
deny such application on substantive grounds when it reconsiders the matter,
and the Company cannot predict whether WTCI will ultimately receive the
necessary authorizations to operate the planned uplink station. If Telesat
notifies the Company that Telesat has obtained all government approvals and
authorizations required to be obtained by Telesat in connection with the
Telesat Transaction, prior to the Company obtaining its required government
approvals and authorizations, Telesat would have the right to terminate the
Telesat Transaction, under its agreement with the Company.
Construction of one of the Company Satellites ("Satellite No. 1") has been
completed and has been outfitted with an antenna for the 82(degrees) W.L.
orbital location. Construction of the other Company Satellite
F-24
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
("Satellite No. 2") has been completed except for the installation of an
antenna. Loral has advised the Company that the Company must notify Loral of
the required antenna configuration of Satellite No. 2 on or about November 1,
1996, for Satellite No. 2 to be ready for launch by February Launch Date
(defined below).
Pursuant to the "Satellite Construction Agreement" with Loral, Tempo has
arranged for two possible launches, one currently scheduled for launch on
December 19, 1996 (the "December Launch Date"), and the other scheduled for
launch on February 27, 1997 (the "February Launch Date"). In order to meet the
December Launch Date, one of the Company Satellites would have to be shipped
from Loral's facility on or about November 13, 1996. The Company is currently
in discussions with Loral and other parties with respect to the possibility of
obtaining an additional launch window in 1997 to replace the December Launch
Date. However, there can be no assurance that such a launch window can be
arranged at this time or will be available on terms acceptable to the Company.
If the Company is unable to utilize the December Launch Date or to obtain a
replacement launch window in 1997, the Company would not be able to deploy one
of the Company Satellites before 1998.
If the Company receives all necessary regulatory approvals for the Telesat
Transaction by November 1, 1996, the Company currently intends to launch
Satellite No. 1 into the 82(degrees) W.L. orbital location on the December
Launch Date. In addition, Tempo will instruct Loral to install an antenna on
Satellite No. 2 that is suitable for operation at the 91(degrees) W.L. orbital
location. In such event, Satellite No. 2 will be shipped to its launch site in
time for the February Launch Date and is expected to be deployed temporarily
into the 91(degrees) W.L. orbital position before being moved to 82(degrees)
W.L.
If the Company receives all necessary regulatory approvals for the Telesat
Transaction after November 1, 1996, but on or before November 13, 1996, then
subject to Telesat's agreeing to amend its agreements with the Company to
eliminate the references to a satellite being deployed at 91(degrees) W.L., the
Company currently intends to launch Satellite No. 1 into the 82(degrees) W.L.
orbital location on the December Launch Date. In addition, it is expected that
the Company will instruct Loral to install an antenna on Satellite No. 2 that
is suitable for operation at the 119(degrees) W.L. orbital location. Satellite
No. 2 will be shipped to its launch site in time for the February Launch Date
and will be launched into the 119(degrees) W.L. orbital location.
If all necessary regulatory approvals are not received by November 13, 1996,
or if such approvals are received but the agreements with Telesat have not been
amended as described above, Satellite No. 2 will be launched into the
119(degrees) W.L. orbital location on the February Launch Date, the December
Launch Date will be deferred with associated penalties and Tempo will place
Satellite No. 1 in storage for future launch into the 82(degrees) W.L. orbital
location or otherwise to be disposed of or deployed in such manner as the
Company and PRIMESTAR Partners may determine.
If regulatory and other conditions to the Telesat Transaction are satisfied
and the Telesat Transaction is consummated with either or both of the Company
Satellites, the Company and PRIMESTAR Partners have been discussing the
Company's making available to PRIMESTAR Partners all of the rights and benefits
(including the purchase price for the Company Satellites), and PRIMESTAR
Partners assuming all of the obligations (including the repurchase price for
the 27 transponders to be repurchased from Telesat), of the Company under the
agreements with Telesat. Further, if one of the Company Satellites is launched
into 119(degrees) W.L., the discussions between the Company and PRIMESTAR
Partners contemplate that the Company would make 100% of the capacity on such
satellite available to PRIMESTAR Partners and that PRIMESTAR Partners would
reimburse the Company for the costs of operating such satellite. In each of the
foregoing circumstances, the Company would be unconditionally released from any
obligation it may have to repay PRIMESTAR Partners for its funding of the costs
of constructing and launching the Company Satellites. However, if the Company
and PRIMESTAR Partners are unable to reach
F-25
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
agreement with respect to the foregoing, the Company will consider other
potential uses for the available capacity on the Company Satellites, which
could include using such capacity in connection with another DBS business
opportunity.
Tempo DBS System.
Tempo's Construction Permit authorizes the construction of a DBS system with
11 frequency channels at 119(degrees) W.L. and 11 frequency channels at
166(degrees) W.L. The 119(degrees) W.L. position is generally visible to home
satellite dishes throughout all fifty states; the 166(degrees) is visible only
in the western half of the continental U.S. as well as Alaska and Hawaii. Under
Tempo's Satellite Construction Agreement with Loral, Loral is committed to
supply to Tempo a total of five high power satellites (including the Company
Satellites) and other items relating to such satellites. Subject to completion
of the Telesat Transaction, the Company has exercised its option under the
Satellite Construction Agreement to purchase Satellite No. 3. Under those
circumstances, Satellite No. 3 would be designated for deployment in the
119(degrees) W.L. orbital position and scheduled for launch by May 1998
pursuant to Tempo's Construction Permit.
If the Telesat Transaction is not consummated, the Company intends to deploy
one of the Company Satellites in the 119(degrees) W.L. orbital position and to
place the second Company Satellite in storage for future deployment or other
disposition as determined by Tempo".
Satellite Launches.
Pursuant to the Satellite Construction Agreement, following the launch of a
satellite, Loral will conduct in-orbit testing. Delivery of a satellite takes
place upon Tempo's acceptance of such satellite after completion of in-orbit
testing ("Delivery"). Subject to certain limits, Loral must reimburse Tempo for
Tempo's actual and reasonable expenses directly incurred as a result of any
delays in the Delivery of satellites. The in-orbit useful life of each
satellite is designed to be a minimum of 12 years. If in-orbit testing confirms
that the satellite conforms fully to specifications and the service life of the
satellite will be at least 12 years, Tempo is required to accept the satellite.
If in-orbit testing determines that the satellite does not fully conform to
specifications but at least 50% of its transponders are functional and the
service life of the satellite will be at least six years, Tempo is required to
accept the satellite but is entitled to receive a proportionate decrease in the
purchase price. If Loral fails to deliver a satellite, it has 29 months to
deliver, at its own expense, a replacement satellite. Loral may make four
attempts to launch the two Company Satellites; however, if the two Company
Satellites are not delivered in such four attempts, Tempo may terminate the
Satellite Construction Agreement. Tempo also may terminate the contract in the
event of two successive satellite failures.
Loral has warranted that, until the satellites are launched, the satellites
will be free from defects in materials or workmanship and will meet the
applicable performance specifications. In addition, Loral has warranted that
all items other than the satellites delivered under the Satellite Construction
Agreement will be free from defects in materials or workmanship for one year
from the date of their acceptance and will perform in accordance with the
applicable performance specifications. Loral bears the risk of loss of the
Company Satellites until Delivery. Upon Delivery, title and risk of loss pass
to Tempo. However, Loral is obligated to carry risk insurance on each satellite
covering the period from the launch of the satellite through an operating
period of 180 days. Such risk insurance will cover (i) the cost of any damages
due under the Satellite Construction Agreement; (ii) the cost of delivery of a
replacement satellite in the event of a satellite failure; and (iii) the refund
of the full purchase price for each undelivered Company Satellite if Loral
fails to deliver both Company Satellites after four attempts. Loral is also
required to obtain insurance indemnifying Tempo from any third party claims
arising out of the launch of a satellite.
F-26
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Tempo Option.
In February 1990, Tempo entered into an option agreement with PRIMESTAR
Partners (the "Option Agreement"), granting PRIMESTAR Partners the right and
option (the "Tempo Option"), upon exercise, to purchase or lease 100% of the
capacity of the DBS system to be built, launched and operated by Tempo
pursuant to the Construction Permit. Under the Option Agreement, upon the
exercise of the Tempo Option, PRIMESTAR Partners would be obligated to pay
Tempo $1,000,000 (the "Exercise Price") and lease or purchase the entire
capacity with the purchase price (or aggregate loan payments) being sufficient
to cover the cost of constructing, launching and operating such proposed
system. In connection with the Tempo Option and certain related matters, Tempo
and PRIMESTAR Partners subsequently entered into two letter agreements (the
"Tempo Letter Agreements"), which provided for, among other things, the
funding by PRIMESTAR Partners of milestone and other payments due under the
Satellite Construction Agreement, and certain related costs, through advances
by PRIMESTAR Partners to Tempo. PRIMESTAR Partners financed such advances to
Tempo through borrowings under the PRIMESTAR Credit Facility which was in turn
supported by letters of credit arranged for by affiliates of all but one of
the partners of PRIMESTAR Partners. The aggregate funding provided to Tempo by
PRIMESTAR Partners is reflected in "Due to PRIMESTAR Partners" in the
accompanying combined balance sheets. At December 31, 1995, the amount
borrowed by PRIMESTAR Partners under the PRIMESTAR Credit Facility was
$419,000,000, including accrued interest. See note 5.
The Tempo Letter Agreements permit PRIMESTAR Partners to apply its advances
to Tempo against any payments (other than the Exercise Price) due under the
Tempo Option and would not require Tempo to repay such advances unless
PRIMESTAR Partners elected to stop funding amounts due under the Satellite
Construction Agreement or failed to exercise the Tempo Option within the
period provided for in the Tempo Letter Agreements, in which event Tempo
could, in lieu of making such repayment, elect to assign all of its rights
relating to the Company Satellites to PRIMESTAR Partners.
On February 29, 1996, Tempo notified PRIMESTAR Partners of Tempo's belief
that PRIMESTAR Partners had failed to effectively exercise the Tempo Option
and that such failure had resulted in the termination of the Tempo Option
pursuant to the Tempo Letter Agreements. In that connection, Tempo advised
PRIMESTAR Partners that, based on and assuming the effective termination of
the Tempo Option, Tempo would reimburse PRIMESTAR Partners for its advances to
Tempo by assuming PRIMESTAR Partner's indebtedness for borrowed money under
the PRIMESTAR Credit Facility, to the extent used to fund such advances.
Tempo's belief that PRIMESTAR Partners failed to effectively exercise the
Tempo Option is based, among other things, on the fact that despite the
Partnership's notice to Tempo at the July 29, 1994 meeting of the Partners
Committee of its exercise of the Tempo Option, since such date, PRIMESTAR
Partners has failed to take any of the actions contemplated by the Option
Agreement to be taken following exercise of the Tempo Option, including (i)
advising Tempo whether it intends to purchase or lease the capacity of the DBS
system referred to in the Option Agreement, (ii) negotiating an agreement of
purchase or lease with Tempo and (iii) paying Tempo the Exercise Price.
Moreover, in December 1995, a representative of PRIMESTAR Partners informed
the Company that the July 1994 exercise of the Tempo Option had been intended
as a conditional exercise, although conditional exercises are not contemplated
by the Option Agreement, and that the conditions upon which the Tempo Option
had purportedly been exercised had not been met.
Counsel for PRIMESTAR Partners subsequently notified Tempo that PRIMESTAR
Partners disagreed with the positions advanced by Tempo in the February 29
letter, and believed that PRIMESTAR Partners has effectively and irrevocably
exercised the Tempo Option and was asserting certain rights to the Company
Satellites. Counsel for PRIMESTAR Partners also advised Tempo that PRIMESTAR
Partners would impede any
F-27
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
attempt by Tempo to repay PRIMESTAR Partners' advances. The Partners Committee
of PRIMESTAR Partners has failed, however, to vote to confirm that PRIMESTAR
Partners has irrevocably and unconditionally exercised the Tempo Option. The
Company believes that PRIMESTAR Partners' position is based primarily on
equitable arguments relating to the advances made by PRIMESTAR Partners to
Tempo under the Tempo Letter Agreements and their misreading of the terms of
the Option Agreement and the Tempo Letter Agreements. The Company believes the
PRIMESTAR Partners' claims regarding the Company Satellites and the Tempo
Option are without merit, but there can be no assurance that Tempo's position
would prevail in the event of any litigation regarding this controversy.
The Company and PRIMESTAR Partners are currently attempting to resolve their
disagreement regarding the Tempo Option. In that connection, the Company and
PRIMESTAR Partners have discussed the alternatives available to the Company for
deployment of the Company Satellites and the terms and provisions under which
the Company would make available to PRIMESTAR Partners 100% of the capacity of
one or more Company Satellites as so deployed. Although the Company and
PRIMESTAR Partners have not reached agreement with respect to any such
resolution of their dispute, and there can be no assurance that any such
resolution can be reached, or can be reached on terms acceptable to the
Company, the Company does currently believe that its dispute with PRIMESTAR
Partners will be resolved and does not believe that such dispute or its
resolution is reasonably likely to have a material adverse effect on the
Company.
(7) INCOME TAXES
The Company is included in the consolidated Federal and state income tax
returns of TCI. Income tax benefit for the Company is based on those items in
TCI's consolidated calculation applicable to the Company. Intercompany tax
allocation represents an apportionment of tax expense or benefit (other than
deferred taxes) among subsidiaries of TCI in relation to their respective
amounts of taxable earnings or losses. The payable or receivable arising from
the intercompany tax allocation is recorded as an increase or decrease in "Due
to TCIC," as reflected in the accompanying combined balance sheets.
A tax sharing agreement (the "Tax Sharing Agreement") among TCIC and certain
other subsidiaries of TCI was implemented effective July 1, 1995. The Tax
Sharing Agreement formalizes certain of the elements of a pre-existing tax
sharing arrangement and contains additional provisions regarding the allocation
of certain consolidated income tax attributes and the settlement procedures
with respect to the intercompany allocation of current tax attributes. The Tax
Sharing Agreement encompasses U.S. Federal, state, local and foreign tax
consequences and relies upon the U.S. Internal Revenue Code of 1986 as amended,
and any applicable state, local and foreign tax law and related regulations.
Beginning on the July 1, 1995 effective date, TCIC is responsible to TCI for
its share of current consolidated income tax liabilities. TCI is responsible to
TCIC to the extent that TCIC's income tax attributes generated after the
effective date are utilized by TCI to reduce its consolidated income tax
liabilities. Accordingly, all tax attributes generated by TCIC's operations
after the effective date including, but not limited to, net operating losses,
tax credits, deferred intercompany gains, and the tax basis of assets are
inventoried and tracked for the entities comprising TCIC. The Company's
intercompany income tax allocation for the six months ended December 31, 1995,
has been calculated in accordance with the Tax Sharing Agreement, and is not
materially different from the intercompany allocation that would have been
calculated under the pre-existing tax sharing arrangement. In connection with
the Distribution, the Tax Allocation Agreement will be amended to provide that
the Company will be treated as if it had been a party to the Tax Sharing
Agreement, effective July 1, 1995.
F-28
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Income tax benefit (expense) for the years ended December 31, 1995, 1994 and
1993 consists of (amounts in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Year ended December 31, 1995:
Intercompany allocation........................... $35,735 -- 35,735
Federal........................................... -- (7,546) (7,546)
State and local................................... -- (981) (981)
------- ------ ------
$35,735 (8,527) 27,208
======= ====== ======
Year ended December 31, 1994:
Intercompany allocation........................... $ 9,371 -- 9,371
Federal........................................... -- -- --
State and local................................... -- -- --
------- ------ ------
$ 9,371 -- 9,371
======= ====== ======
Year ended December 31, 1993:
Intercompany allocation........................... $ 3,403 -- 3,403
Federal........................................... -- -- --
State and local................................... -- -- --
------- ------ ------
$ 3,403 -- 3,403
======= ====== ======
</TABLE>
Income tax benefit (expense) differs from the amounts computed by applying
the Federal income tax rate of 35% as a result of the following (amounts in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax benefit.................. $ 28,738 8,801 2,569
State and local income taxes, net of Federal
income tax benefit.............................. (1,661) (75) (103)
Change in valuation allowance.................... (3,419) 653 898
Adjustment to deferred tax assets and liabilities
for enacted change in Federal income tax rate... -- -- 43
Other............................................ (59) (8) (4)
--------- ------- -------
$ 23,599 9,371 3,403
========= ======= =======
</TABLE>
F-29
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995 and 1994 are presented below (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1994
------- -----
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards....................... $ 6,541 821
Investment in PRIMESTAR Partners, due principally to
losses recognized for financial statement purposes in
excess of losses recognized for income tax purposes.... 1,049 978
Future deductible amounts principally due to non-
deductible accruals.................................... 1,906 629
------- -----
Total deferred tax assets............................. 9,496 2,428
------- -----
Deferred tax liability--
Property and equipment, principally due to differences
in depreciation net of increase in tax basis resulting
from intercompany transfer............................. 5,888 2,239
------- -----
Net deferred tax asset before valuation allowance $ 3,608 189
Valuation allowance....................................... (3,608) (189)
------- -----
Net deferred tax asset................................ $ -- --
======= =====
</TABLE>
On February 22, 1995, the assets (primarily property and equipment) and
liabilities comprising PRIMESTAR By TCI were transferred from certain
subsidiaries of TCIC to the predecessor of TSEI. Such transfer was recorded at
TCIC's carryover basis for financial reporting purposes. In connection with
such transfers, the Company recorded an $8,527,000 non-cash increase to the
intercompany amount owed to TCIC, and an $8,527,000 non-cash decrease to the
Company's deferred tax liability.
The Company has analyzed the sources and expected reversal periods of its
deferred tax assets. The Company believes that the tax benefits attributable to
deductible temporary differences will be realized to the extent of future
reversals of existing taxable temporary differences. No tax benefit has been
recognized on remaining operating loss carryforwards due to the Company's
history of operating losses.
At December 31, 1995, the Company had net operating loss carry forwards for
income tax purposes aggregating approximately $18,688,000 of which, if not
utilized to reduce taxable income in future periods, $2,347,000 expire in 2006
and $16,341,000 expire in 2010.
(8) TRANSACTIONS WITH RELATED PARTIES
The effects of all transactions between the Company and TCIC have been
reflected as adjustments to the non-interest bearing intercompany account
between the Company and TCIC. For a description of certain agreements that the
Company and TCI will enter into in connection with the Distribution, see note
2.
TCIC provides certain installation, maintenance, retrieval and other customer
fulfillment services to the Company. The costs associated with such services
have been allocated to the Company based upon a standard charge for each of the
various customer fulfillment activities performed by TCIC. During the years
ended December 31, 1995, 1994 and 1993, the Company's capitalized installation
costs included amounts allocated
F-30
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
from TCIC of $57,058,000, $15,369,000 and $4,511,000, respectively.
Maintenance, retrieval and other operating expenses allocated from TCIC to the
Company aggregated $15,916,000, $4,368,000 and $1,577,000 during the years
ended December 31, 1995, 1994 and 1993, respectively. Following the
Distribution, charges for customer fulfillment services provided by TCI will be
made pursuant to the Fulfillment Agreement. See note 2.
TCIC also provides corporate administrative services to the Company. Such
administrative expenses, which were allocated from TCIC to the Company based
primarily on the estimated cost of providing the service, aggregated
$7,817,000, $1,080,000 and $795,000 during the years ended December 31, 1995,
1994 and 1993, respectively. Following the Distribution, charges for
administrative services provided by TCI will be made pursuant to the Transition
Services Agreement. See note 2.
Certain key employees of the Company hold stock options in tandem with stock
appreciation rights with respect to certain common stock of TCI. Estimates of
the compensation related to the options and/or stock appreciation rights
granted to employees of the Company have been recorded in the accompanying
financial statements, but are subject to future adjustment based upon the
market value of the underlying TCI common stock and, ultimately, on the final
determination of market value when the rights are exercised. Non-cash increases
(decreases) to the Company's share of TCI's estimated stock compensation
liability, which are included in the above-described TCIC administrative
expense allocations, aggregated $901,000, ($87,000) and $449,000 during the
years ended December 31, 1995, 1994 and 1993, respectively. See note 2.
(9) COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $73,000,000.
In 1994, the Company began to engage master sales agents (the "Master
Agents") to recruit, train and maintain a network of agents to sell services on
behalf of the Company and to install, service and maintain equipment located at
the premises of subscribers. As part of the compensation for such services, the
Company has agreed to pay certain residual sales commissions equal to a
percentage of the programming revenue collected from a subscriber installed by
a Master Agent during specified periods following the initiation of service
(generally five years). Residual payments to Master Agents aggregated
$2,178,000 during 1995 and were immaterial in prior years.
The Company leases business offices and uses certain equipment under lease
arrangements. Rental expense under such arrangements amounted to $1,257,000 in
1995 and was immaterial in prior years. It is expected that, in the normal
course of business, expiring leases will be renewed or replaced by leases on
other properties; thus, it is anticipated that future minimum lease commitments
will not be less than the rental expense incurred during 1995.
As described in note 2, TCI UA 1 has arranged for the issuance of the TCI UA
1 Letter of Credit to support the Company's pro rata share of the PRIMESTAR
Credit Facility. The amount of the TCI UA 1 Letter of Credit was $141,250,000
at December 31, 1995. In connection with the Distribution, the Company will
agree to indemnify TCI UA 1 for any loss, claim or liability that TCI UA 1 may
incur by reason of the TCI UA 1 Letter of Credit. See notes 2, 5 and 6.
TCIC has arranged for the issuance of a standby letter of credit to support
the Company's share of PRIMESTAR Partners' obligations under the GE-2 Agreement
with respect to PRIMESTAR Partners' use of a Replacement Satellite. The
original maximum drawable amount of such letter of credit is approximately
F-31
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
$25,000,000, increasing to approximately $75,000,000 if PRIMESTAR Partners
exercises the End-Of-Life Option, as described in note 5. Pursuant to one of
the Indemnification Agreements to be entered into by the Company in connection
with the Distribution, the Company will be required to reimburse TCIC for any
amounts drawn under this standby letter of credit. See note 2.
At December 31, 1995, the Company had guaranteed approximately $5,600,000 of
certain minimum commitments of PRIMESTAR Partners to purchase satellite
reception equipment.
The Company has contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
combined financial statements.
(10) SUBSEQUENT EVENTS
Sale of Proprietary Equipment to Subscribers.
Subsequent to December 31, 1995, the Company initiated a marketing program
that allows subscribers to purchase the Company's proprietary satellite
reception equipment at a price that is less than the Company's cost. The
difference between the Company's costs and the revenue generated from the sale
of the proprietary
equipment, together with the related subscriber installation costs, represent
subscriber acquisition costs that will be deferred and amortized over the
estimated weighted average life of a subscriber (4 years). Any subscriber
acquisition costs that have not been fully amortized at the time service to a
subscriber is terminated will be charged to amortization expense during the
period in which such termination occurs.
Resnet Transaction
Effective as of October 21, 1996, the Company acquired 4.99% of the issued
and outstanding capital stock of ResNet Communications, Inc., a Delaware
corporation ("ResNet"). ResNet was formed by LodgeNet Entertainment
Corporation, a Delaware corporation, in February 1996 to engage in the business
of providing video services to subscribers in multiple dwelling units (the
"ResNet Business"). ResNet agreed to purchase from the Company up to $40
million in satellite reception equipment to be used in connection with the
ResNet Business exclusively, over a five year period (subject to a one-year
extension at the option of ResNet if ResNet has not purchased the full $40
million in equipment during the five-year initial term). The Company also
agreed to make a subordinated convertible term loan to ResNet, the proceeds of
which can be used only to purchase such equipment from the Company. The term of
the loan is five years with an option by ResNet to extend the term for one
additional year. The total principal and accrued and unpaid interest under the
loan is convertible over a four-year period into shares of common stock of
ResNet that will provide the Company with the right to acquire an additional
32% of the issued and outstanding common stock of ResNet. The Company's only
recourse with respect to repayment of the loan is conversion into ResNet stock
or warrants as described below. Under current interpretations of the FCC rules
and regulations related to restrictions on the provision of cable and satellite
master antenna television services in certain areas. The Company could be
prohibited from holding 5% or more of the stock of ResNet and consequently
could not exercise the conversion rights under the convertible loan agreement.
The Company is required to convert the convertible loan at such time as
conversion would not violate such currently applicable regulatory restrictions.
In addition, ResNet granted the Company an option to acquire an additional
13.01% of the issued and outstanding common stock of ResNet at appraised fair
market value at the time of exercise of the option. The option is exercisable
between December 21, 1999 and the maturity of the convertible loan. Upon the
maturity date of the convertible loan, if the Company has been prevented from
converting the loan or exercising the option in full due to the previously
described regulatory
F-32
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
restrictions, ResNet will issue warrants to the Company to acquire the stock
that has not been issued pursuant to conversion of the loan and the stock that
the Company has a right to acquire by exercise of the option. The exercise
price of the warrants will be de minimus, and the exercise price of the
warrants to be issued in respect of the option will be equivalent to the
exercise price under such option. The Company has agreed to customary
standstill provisions with respect to acquisitions of more than 10% of the
outstanding stock of LodgeNet and any additional shares of ResNet.
The Company also entered into a long-term signal availability agreement with
ResNet, pursuant to which the Company will transport to certain defined private
cable systems owned and operated by ResNet, the satellite signal used by
PRIMESTAR Partners to transmit the PRIMESTAR(R) programming service (the
"PRIMESTAR Satellite Signal") or the signal of a substantially comparable
service. The Company is acting solely to make the PRIMESTAR Satellite Signal
available to ResNet and is not acting as a distributor of any PRIMESTAR(R)
programming services to ResNet. ResNet must obtain its own rights from the
applicable programming networks to receive the programming services and to
distribute them to ResNet's subscribers. WTCI has the right from PRIMESTAR
Partners to use the PRIMESTAR Satellite Signal for delivery of programming for
the benefit of third parties, including private cable systems (the
"Simultaneous Use Rights"). WTCI has agreed with the Company that private cable
systems designated by the Company, including the ResNet private cable systems,
will receive the transport of the PRIMESTAR Satellite Signal by WTCI in
exchange for the payment by the Company of a per subscriber per video program
signal. The agreement between the Company and WTCI is coextensive with the
agreement between WTCI and PRIMESTAR Partners, expiring on March 31, 2001, and
there is no assurance that the Company will continue to have the ability to
make the PRIMESTAR Satellite Signal available after that date. In its agreement
with ResNet, the Company has committed to make the PRIMESTAR Satellite Signal
or the signal of a substantially comparable service available for a term that
extends substantially beyond March 31, 2001. If the Company loses its
contractual ability to make the PRIMESTAR Satellite Signal available and is not
able to make the signal of a substantially comparable service available, the
Company is obligated to reimburse ResNet for its costs in obtaining a digital
signal from another source, including the cost of replacement equipment if the
new digital signal is not compatible with ResNet's equipment. While it is not
possible at this time to quantify the amount that the Company would be
obligated to pay to ResNet under the circumstances described above, the Company
believes that the costs could be significant, particularly if it were to lose
its ability to make a signal available towards the end of its agreement with
ResNet.
Counsel to PRIMESTAR Partners has advised the Company of the Partnership's
position that there are certain preconditions to WTCI's Simultaneous Use Rights
which have not yet been satisfied and that such rights are not assignable by
WTCI to the Company. The Company believes that its transaction with ResNet and
similar transactions are permitted under the agreements between WTCI and
PRIMESTAR Partners. The Company does not believe that any potential dispute
with the Partnership regarding this issue is likely to have a material adverse
effect on the Company.
F-33
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
AMOUNTS IN THOUSANDS
<S> <C> <C>
ASSETS
Cash................................................. $ 6,335 1,801
Accounts receivable.................................. 19,180 29,192
Less allowance for doubtful accounts................. 4,241 4,819
---------- -------
14,939 24,373
---------- -------
Prepaid expenses..................................... 352 86
Investment in, and related advances to, PRIMESTAR
Partners L.P. ("PRIMESTAR Partners") (note 4)....... 28,847 17,963
Property and equipment, at cost:
Satellite reception systems........................ 678,022 539,843
Support equipment.................................. 18,129 12,395
Cost of satellites under construction (note 5)..... 419,584 382,900
---------- -------
1,115,735 935,138
Less accumulated depreciation...................... 115,066 63,250
---------- -------
1,000,669 871,888
---------- -------
$1,051,142 916,111
========== =======
<CAPTION>
LIABILITIES AND PARENT'S INVESTMENT
<S> <C> <C>
Accounts payable..................................... $ 6,118 11,378
Accrued charges from PRIMESTAR Partners (note 4)..... 47,056 26,420
Other accrued expenses............................... 10,465 11,484
Subscriber advance payments.......................... 17,671 13,243
Due to PRIMESTAR Partners (note 5)................... 386,219 382,900
---------- -------
Total liabilities................................ 467,529 445,425
---------- -------
Parent's investment:
Accumulated deficit................................ (138,488) (86,100)
Due to TCI Communications, Inc. ("TCIC") (notes 2
and 6)............................................ 722,101 556,786
---------- -------
Total parent's investment........................ 583,613 470,686
---------- -------
Commitments and contingencies (notes 2, 4, 5, 6, 7
and 8)
$1,051,142 916,111
========== =======
</TABLE>
See accompanying notes to combined financial statements.
F-34
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1996 1995
----------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Revenue:
Programming and equipment rental...................... $ 156,870 37,362
Installation.......................................... 36,777 24,249
----------- ---------
193,647 61,611
----------- ---------
Operating costs and expenses:
Charges from PRIMESTAR Partners (note 4):
Programming......................................... 57,463 14,309
Satellite, marketing and distribution............... 29,422 7,387
Other operating:
TCIC (note 6)....................................... 10,505 7,136
Other............................................... 4,345 705
Selling, general and administrative:
TCIC (note 6)....................................... 9,576 2,223
Other............................................... 75,314 24,957
Depreciation.......................................... 83,230 26,625
----------- ---------
269,855 83,342
----------- ---------
Operating loss.................................... (76,208) (21,731)
----------- ---------
Other income (expense):
Share of losses of PRIMESTAR Partners (note 4)........ (1,446) (4,988)
Other, net............................................ 193 143
----------- ---------
(1,253) (4,845)
----------- ---------
Loss before income taxes.......................... (77,461) (26,576)
----------- ---------
Income tax benefit...................................... 25,073 9,724
----------- ---------
Net loss.......................................... $ (52,388) (16,852)
=========== =========
</TABLE>
See accompanying notes to combined financial statements.
F-35
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF PARENT'S INVESTMENT
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED DUE TO PARENT'S
DEFICIT TCIC INVESTMENT
----------- ------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Balance at January 1, 1996...................... $ (86,100) 556,786 470,686
Net loss...................................... (52,388) -- (52,388)
Allocation of TCIC expenses................... -- 20,081 20,081
Allocation of TCIC installation costs......... -- 23,319 23,319
Intercompany income tax allocation............ -- (25,073) (25,073)
Net cash transfers from TCIC.................. -- 146,988 146,988
--------- ------- -------
Balance at June 30, 1996........................ $(138,488) 722,101 583,613
========= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-36
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1995
---------- ----------
AMOUNTS IN THOUSANDS
(SEE NOTE 3)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (52,388) (16,852)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation.......................................... 83,230 26,625
Share of losses of PRIMESTAR Partners................. 1,446 4,988
Deferred income tax benefit........................... -- (3,387)
Other non-cash charges (credits)...................... (163) 209
Changes in operating assets and liabilities:
Change in receivables................................ 9,434 (8,770)
Change in prepaids................................... (266) (177)
Change in accruals and payables...................... 14,357 15,890
Change in subscriber advance payments................ 4,428 3,210
---------- ---------
Net cash provided by operating activities........... 60,078 21,736
---------- ---------
Cash flows from investing activities:
Capital expended for construction of satellites........ (36,684) (43,631)
Capital expended for property and equipment............ (175,340) (139,397)
Additional investments in and loans to PRIMESTAR Part-
ners.................................................. (12,330) (7,027)
---------- ---------
Net cash used in investing activities............... (224,354) (190,055)
---------- ---------
Cash flows from financing activities:
Increase in due to PRIMESTAR Partners.................. 3,319 43,631
Increase in due to TCIC................................ 165,491 124,688
---------- ---------
Net cash provided by financing activities........... 168,810 168,319
---------- ---------
Net increase in cash................................ 4,534 --
Cash at beginning of period......................... 1,801 --
---------- ---------
Cash at end of period............................... $ 6,335 --
========== =========
</TABLE>
See accompanying notes to combined financial statements.
F-37
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying combined financial statements of "TCI SATCO" represent a
combination of the historical financial information of certain satellite
television assets of TCIC, a subsidiary of Tele-Communications, Inc. ("TCI").
Upon consummation of the spinoff transaction described in note 2, TCI Satellite
Entertainment, Inc. ("TSEI") will own the assets that comprise "TCI SATCO,"
which assets include (i) a 100% ownership interest in "PRIMESTAR By TCI," the
TCIC business that distributes the PRIMESTAR(R) programming service to
subscribers within specified areas of the continental United States, (ii) a
100% ownership interest in Tempo Satellite, Inc. ("Tempo"), (iii) a 20.86%
aggregate ownership interest in PRIMESTAR Partners, and (iv) TCI's rights under
certain agreements with Telesat Canada ("Telesat").
Tempo holds a construction permit issued by the Federal Communications
Commission ("FCC") authorizing construction of a direct broadcast satellite
("DBS") system. Tempo is also a party to a construction agreement with Space
Systems/Loral, Inc. ("Loral"), pursuant to which Loral is currently
constructing two high power communications satellites (the "Company
Satellites"). PRIMESTAR Partners, which was formed as a limited partnership in
1990 by subsidiaries of TCIC, several other cable operators, and General
Electric Company, broadcasts satellite entertainment services that are
delivered to the home through PRIMESTAR By TCI and certain other authorized
distributors.
In the following text, the "Company" may, as the context requires, refer to
"TCI SATCO" (prior to the completion of the spinoff transaction described in
note 2), TSEI and its consolidated subsidiaries (subsequent to the completion
of the spinoff transaction described in note 2) or both. Additionally, unless
the context indicates otherwise, references to "TCI" and "TCIC" herein are to
TCI and TCIC, together with their respective consolidated subsidiaries (other
than the Company).
All significant inter-entity transactions have been eliminated.
As further discussed in note 6, the accompanying combined statements of
operations include allocations of certain costs and expenses of TCIC. Although
such allocations are not necessarily indicative of the costs that would have
been incurred by the Company on a stand-alone basis, management believes the
resulting allocated amounts are reasonable.
The accompanying interim financial statements are unaudited but, in the
opinion of management, reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results of such periods. The
results of operations for any interim period are not necessarily indicative of
results for the full year. The unaudited interim combined financial statements
should be read in conjunction with the Company's December 31, 1995 audited
combined financial statements and notes thereto.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
F-38
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) SPINOFF TRANSACTION
On June 17, 1996, the Board of Directors of TCI (the "TCI Board") announced
its intention to spinoff all the capital stock of the Company to the holders of
Tele-Communications, Inc. Series A TCI Group Common Stock (the "Series A TCI
Group Common Stock") and Tele-Communications, Inc. Series B TCI Group Common
Stock (the "Series B TCI Group Common Stock" and, together with the Series A
TCI Group Common Stock, the "TCI Group Common Stock"). The spinoff will be
effected as a distribution (the "Distribution") by TCI to holders of its TCI
Group Common Stock of shares of the Series A Common Stock of the Company (the
"Series A Common Stock") and Series B Common Stock of the Company (the "Series
B Common Stock"). The Distribution will not involve the payment of any
consideration by the holders of TCI Group Common Stock (such holders, the "TCI
Group Stockholders"), and is intended to qualify as a tax-free spinoff. The
Distribution is expected to occur in the fourth quarter of 1996, on a date (the
"Distribution Date") to be determined by the TCI Board, and will be made as a
dividend to holders of TCI Group Common Stock of record as of the close of
business on a record date (the "Record Date") to be determined by the TCI
Board.
Stockholders of record of TCI Group Common Stock on the Record Date will
receive one share of Series A Common Stock for each ten shares of Series A TCI
Group Common Stock owned of record at the close of business on the Record Date
and one share of Series B Common Stock for each ten shares of Series B TCI
Group Common Stock owned of record as of the close of business on the Record
Date. Fractional shares will not be issued. Fractions of one-half or greater of
a share will be rounded up and fractions of less than one-half of a share will
be rounded down to the nearest whole number of shares of Series A Common Stock
and Series B Common Stock.
Following the Distribution, the Company and TCI will operate independently,
and neither will have any stock ownership, beneficial or otherwise, in the
other. For the purposes of governing certain of the ongoing relationships
between the Company and TCI after the Distribution, and to provide mechanisms
for an orderly transition, on, or before the Distribution Date the Company and
TCI will enter into various agreements, including the "Reorganization
Agreement," the "Fulfillment Agreement," the "TCIC Credit Facility," the
"Transition Services Agreement," an amendment to TCI's existing "Tax Sharing
Agreement" and the "Indemnification Agreements."
Reorganization Agreement
The Reorganization Agreement will provide for, among other things, the
transfer to the Company of the assets of TCI SATCO, and for the assumption by
the Company of related liabilities. No consideration will be payable by the
Company for these transfers, except that two subsidiaries of the Company will
purchase TCIC's partnership interests in PRIMESTAR Partners for consideration
payable by delivery of promissory notes issued by such subsidiaries, which
promissory notes will be assumed by TCI on or before the Distribution Date in
the form of a capital contribution to the Company. The Reorganization Agreement
will also provide for certain cross-indemnities designed to make the Company
financially responsible for all liabilities relating to the digital satellite
business conducted by TCI prior to the Distribution, as well as for all
liabilities incurred by the Company after the Distribution, and to make TCI
financially responsible for all potential liabilities of the Company which are
not related to the digital satellite business, including, for example,
liabilities arising as a result of the Company's having been a subsidiary of
TCI.
Pursuant to the Reorganization Agreement, on or before the Distribution Date,
the Company will issue to TCIC a promissory note (the "Company Note"), in the
principal amount of $250,000,000, representing a portion of the Company's
intercompany balance owed to TCIC on such date. See related discussion below.
F-39
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the Reorganization Agreement, the remainder of the Company's
intercompany balance owed to TCIC on the Distribution Date will be assumed by
TCI in the form of a capital contribution to the Company. In addition, the
Company will assume TCI's obligations under options to be granted on the
Distribution Date to certain key employees of TCI (who are not employees of the
Company) representing, in aggregate, 2.5% of the shares of Company Common Stock
issued and outstanding on the Distribution Date, after giving effect to the
Distribution. See related discussion below.
Fulfillment Agreement
TCIC historically has provided the Company with certain customer fulfillment
services for PRIMESTAR(R) customers enrolled by the Company's direct sales
force and National Call Center. Charges for such services have been allocated
to the Company by TCIC based on scheduled rates.
Pursuant to the Fulfillment Agreement entered into by TCIC and the Company,
TCIC will continue to provide fulfillment services to the Company following the
Distribution with respect to customers of the PRIMESTAR(R) medium power
service. Such services will include installation, maintenance, retrieval,
inventory management and other customer fulfillment services. The Fulfillment
Agreement, which will become effective on the first day of the month following
the Distribution Date. Among other matters, the Fulfillment Agreement (i) sets
forth the responsibilities of TCIC with respect to fulfillment services,
including performance standards and penalties for non-performance, (ii)
provides for TCIC's fulfillment sites to be connected to the billing and
information systems used by the Company, allowing for on-line scheduling and
dispatch of installation and other service calls, and (iii) provides scheduled
rates to be charged to the Company for the various customer fulfillment
services to be provided by TCIC. The Company retains sole control under the
Fulfillment Agreement to establish the retail prices and other terms and
conditions on which installation and other services will be provided to the
Company's customers. The Fulfillment Agreement also provides that, during the
term of the Fulfillment Agreement, TCIC will not provide fulfillment services
to any other wireless or other similar or competitive provider or distributor
of television programming services (other than traditional cable). The
Fulfillment Agreement will have an initial term of two years and is terminable,
on 180 days notice to TCIC, by the Company at any time during the first six
months following the Distribution Date.
There can be no assurance that the terms of the Fulfillment Agreement are not
more or less favorable than those which could be obtained from unaffiliated
third parties, or that comparable services could be obtained by the Company
from third parties on any terms if the Fulfillment Agreement is terminated. The
cost to the Company of the services provided by TCIC under the Fulfillment
Agreement will exceed the standard charges that, historically, have been
allocated to the Company for such services, reflecting in part the value to the
Company, as determined by Company management, of the performance standards,
exclusivity, termination right and certain other provisions included in the
Fulfillment Agreement. See notes 1 and 6.
TCIC Credit Facility
TCIC has agreed to make loans to the Company from time to time up to an
aggregate outstanding principal amount of $500,000,000 (the "TCIC Revolving
Loans"). The terms and conditions of the TCIC Revolving Loans and Company Note
will be provided for in a credit agreement, dated as of the Distribution Date,
between the Company and TCIC (the "TCIC Credit Facility"). The TCIC Revolving
Loans and the Company Note will bear interest at 10% per annum, compounded
semi-annually. Commitment fees equal to 3/8% of the average unborrowed
availability of TCIC's $500,000,000 commitment under the TCIC Credit Facility
will be payable to TCIC annually. Proceeds from the TCIC Revolving Loans may be
used to fund (i) working capital requirements, (ii) capital expenditures
contemplated by the October 1996 business plan of the Company, (iii) up to
$75,000,000 of other capital expenditures and investments and (iv) the
commitment fees payable under the TCIC Credit
F-40
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Facility. The TCIC Credit Facility requires the Company to use its best
efforts to obtain external debt or equity financing after the Distribution
Date. The TCIC Credit Facility further provides for mandatory prepayment of
the TCIC Revolving Loans and the Company Note to the extent and in the amount
that the Company has obtained such external financing. Any such prepayment
from the proceeds of external financing is required to be applied first to the
Company Note and then to repay borrowings and correspondingly reduce the
commitments under the TCIC Credit Facility. The outstanding principal of the
TCIC Revolving Loans and the Company Note, together with accrued interest,
will be due and payable September 30, 2001, the final maturity date of the
TCIC Credit Facility, whether or not sufficient external financing has then
been obtained by the Company.
Borrowings under the TCIC Credit Facility are subject to, among other
things, (a) the Company's representations and warranties being true and
correct on the date of borrowing, (b) the Company's being in compliance with
its covenants in the TCIC Credit Facility, (c) no default having occurred and
being continuing on the borrowing date or being caused by such borrowing and
(d) the Company's being in compliance, in all material respects, with the
terms and conditions of the Indemnification Agreements, the Transition
Services Agreement, the Reorganization Agreement and the Fulfillment
Agreement. The TCIC Credit Facility sets forth the covenants the Company has
agreed to comply with during the term of the TCIC Credit Facility, including
its covenants (i) not to sell, transfer or otherwise dispose of any asset
(other than sales of inventory in the ordinary course of business), without
the prior written consent of TCIC (other than the sale of assets or securities
of a subsidiary if the aggregate consideration payable to the seller in
respect of such sale is not less than the fair market value of such assets),
(ii) not to merge into or consolidate or combine with any other person,
without the prior written consent of TCIC, (iii) not to declare or pay any
dividend or make any distribution on its capital stock (other than in common
stock), or purchase, redeem or otherwise acquire or retire for value any
capital stock of the Company, (iv) to maintain specified minimum numbers of
qualified subscribers from December 31, 1996 through December 31, 1997, (v)
not to incur indebtedness at any time prior to and including December 31, 1997
that would exceed a specified amount per qualified subscriber, (vi) to
maintain specified leverage ratios from January 1, 1998 through September 30,
2001, (vii) to maintain specified minimum ratios of annualized cash flow to
annual interest expense and (viii) to maintain a specified minimum ratio of
annualized cash flow to pro forma debt service.
Transition Services Agreement
Pursuant to the Transition Services Agreement between TCI and the Company,
following the Distribution, TCI will provide to the Company certain services
and other benefits, including certain administrative and other services that
were provided by TCI prior to the Distribution. Pursuant to the Transition
Services Agreement TCI has also agreed to provide the Company with certain
most-favored-customer rights to programming services that TCI or a wholly
owned subsidiary of TCI may own in the future and access to any volume
discounts that may be available to TCI for purchase of home satellite dishes,
satellite receivers and other equipment. As compensation for the services
rendered and for the benefits made available to the Company pursuant to the
Transition Services Agreement, the Company will pay TCI a monthly fee of $1.50
per qualified subscribing household or other customer unit (regardless of the
number of satellite receivers), up to a maximum of $3,000,000 per month, and
reimburse TCI quarterly for direct, out-of-pocket expenses incurred by TCI to
third parties in providing the services. The Transition Services Agreement
will become effective on January 1, 1997, will continue in effect until the
close of business on December 31, 1999, and will be renewed automatically for
successive one-year periods thereafter, unless earlier terminated by (i)
either party at the end of the initial term or the then current renewal term,
as applicable, on not less than 180 days' prior written notice to the other
party, (ii) TCI upon written notice to the Company following certain changes
in control of the Company, and (iii) either party if the other party is the
subject of certain bankruptcy or insolvency-related events.
F-41
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Indemnification Agreements
On or before the Distribution Date, the Company will enter into
Indemnification Agreements (the "Indemnification Agreements") with TCIC, TCI
technology Ventures, Inc. ("TCITV") and TCI UA 1, Inc. ("TCI UA 1"). The
Indemnification Agreement with TCIC will provide for the Company to reimburse
TCIC for any amounts drawn under an irrevocable transferable letter of credit
issued for the account of TCIC to support the Company's share of PRIMESTAR
Partners' obligations under an Amended and Restated Memorandum of Agreement,
effective as of October 18, 1996, between the Partnership and GE Americom,
with respect to PRIMESTAR Partners' use of transponders on a medium power
satellite ("GE-2" or the "Replacement Satellite"), to be launched by GE
Americom to replace the existing satellite used by PRIMESTAR Partners (the
"GE-2 Agreement"). The original drawable amount of such letter of credit is
$25,000,000, increasing to $75,000,000 if PRIMESTAR Partners exercises its
option under the GE-2 Agreement to extend the term of such agreement for the
remainder of the useful life of GE-2. See notes 4 and 7.
The Indemnification Agreement with TCITV will provide for the Company to
indemnify and hold harmless TCITV and certain related persons from and against
any losses, claims and liabilities arising out of certain agreements relating
to the proposed transaction with Telesat, which TCITV will assign to the
Company in connection with the Distribution. See note 6. The Indemnification
Agreement with TCI UA 1 will provide for the Company to reimburse TCI UA 1 for
any amounts drawn under an irrevocable transferable letter of credit issued
for the account of TCI UA 1 (the "TCI UA 1 Letter of Credit"), which supports
a credit facility (the "PRIMESTAR Credit Facility") that was obtained by
PRIMESTAR Partners to finance advances to Tempo for payments due in respect of
the construction of the Company Satellites, and that is supported by letters
of credit arranged for by affiliates of the all but one of partners of
PRIMESTAR Partners.
The TCIC and TCI UA 1 Indemnification Agreements further provide for the
Company to indemnify and hold harmless TCIC and TCI UA 1, respectively, and
certain related persons from and against any losses, claims, and liabilities
arising out of the respective letters of credit or any drawings thereunder.
The payment obligations of the Company to TCIC and TCI UA 1 under such
Indemnification Agreements will be subordinated in right of payment with
respect to certain future obligations of the Company to financial
institutions.
Other Arrangements
In June 1996, the TCI Board authorized TCI to permit certain of its
executive officers to acquire equity interests in certain of TCI's
subsidiaries. In connection therewith, the TCI Board approved the acquisition
by each of two executive officers of TCI who are not employees of the Company
(the "TCI Officers"), of 1.0% of the net equity of the Company. The TCI Board
also approved the acquisition by an executive officer of TCIC who is also the
chief executive officer and a director of the Company (the "Company Officer"),
of 1.0% of the net equity of the Company and the acquisition by an executive
officer of a TCI subsidiary who is also a director, but not an employee, of
the Company (the "TCI Subsidiary Officer"), of 0.5% of the net equity of the
Company. The TCI Board determined to structure such transactions as grants by
the Company to such persons of options to purchase shares of Series A Common
Stock representing 1.0% (in the case of each of the TCI Officers and the
Company Officer) and 0.5% (in the case of the TCI Subsidiary Officer) of the
shares of Series A Common Stock and Series B Common Stock issued and
outstanding on the Distribution Date, determined immediately after giving
effect to the Distribution, but before giving effect to any exercise of such
options. The aggregate exercise price for each such option is equal to 1.0%
(in the case of each of the TCI Officers and the Company Officer) and 0.5% (in
the case of the TCI Subsidiary Officer) of TCI's Net Investment (as defined
below) as of the first to occur of the Distribution Date and the date on which
such option first becomes exercisable, but excluding any portion of TCI's Net
Investment that as of such date is represented by a promissory note or other
evidence of
F-42
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
indebtedness from the Company to TCI. TCI's Net Investment is defined for this
purpose as the cumulative amount invested by TCI and its predecessor in the
Company and its predecessors prior to and including the applicable date of
determination, less the aggregate amount of all dividends and distributions
made by the Company and its predecessors to TCI and its predecessor prior to
and including such date. The options will be granted on the Distribution Date,
will vest in 20% cumulative increments on each of the first five anniversaries
of February 1, 1996, and will be exercisable for up to ten years following
February 1, 1996. Pursuant to the Reorganization Agreement, and (in the case of
the TCI Officers and the TCIC Subsidiary Officer) in partial consideration for
the capital contribution to be made by TCI to the Company in connection with
the Distribution, the Company has agreed, effective as of the Distribution
Date, to bear all obligations under such options and to enter into stock option
agreements with respect to such options with each of the TCI Officers, the
Company Officer and the TCI Subsidiary Officer.
In connection with the Distribution, TCI and the Company will also enter into
a "Share Purchase Agreement" to sell to each other from time to time, at the
then current market price, shares of Series A TCI Group Common Stock and Series
A Common Stock, respectively, as necessary to satisfy their respective
obligations after the Distribution Date under certain stock options and stock
appreciation rights held by their respective employees, and certain other
convertible securities. On or prior to the Distribution, the Company will also
enter into an amendment to TCI's existing "Tax Sharing Agreement." See note 6.
(3) SUPPLEMENTAL DISCLOSURES TO COMBINED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes was not material during the six
months ended June 30, 1996 and 1995.
See note 6 for a description of certain non-cash activities.
(4) INVESTMENT IN PRIMESTAR PARTNERS
Summarized unaudited operating information for PRIMESTAR Partners is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1996 1995
--------- -------
<S> <C> <C>
RESULTS OF OPERATIONS
Revenue................................................ $ 185,981 58,322
Operating, selling, general and administrative ex-
penses................................................ (191,571) (81,039)
Depreciation and amortization.......................... (1,626) (1,381)
--------- -------
Operating loss....................................... (7,216) (24,098)
Other income, net...................................... 765 666
--------- -------
Net loss............................................. $ (6,451) (23,432)
========= =======
</TABLE>
PRIMESTAR Partners' indebtedness under the PRIMESTAR Credit Facility
aggregated $433,000,000 at June 30, 1996. The PRIMESTAR Credit Facility matures
on June 30, 1997 and borrowings thereunder are collateralized by letters of
credit issued by all but one of the partners or their affiliated designees. See
notes 5 and 7.
PRIMESTAR Partners currently broadcasts from Satcom K-1 ("K-1"), a medium
power satellite that is nearing the end of its operational life. Although the
Company believes that the Replacement Satellite will be
F-43
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
successfully deployed prior to the expiration of the operational life of K-1,
such deployment is dependent on a number of factors that are outside of the
Company's control and no assurance can be given as to the successful deployment
of the Replacement Satellite. The failure to deploy a fully operational
satellite by the end of K-1's operational life (or the operational life of any
temporary in-orbit replacement that might be available) could have a material
adverse effect on both the Company and PRIMESTAR Partners.
PRIMESTAR Partners is obligated to make certain minimum lease payments
throughout the remaining operational life of K-1. Pursuant to the GE-2
Agreement, it is anticipated that PRIMESTAR Partners will be required to make
minimum lease payments for an initial term of four years from the date of
commercial operation, extendible, at the option of PRIMESTAR Partners exercised
prior to the later of December 31, 1996 and 45 days after written notice to
PRIMESTAR Partners that delivery of the Replacement Satellite has occurred, for
the remainder of the operational life of such Replacement Satellite (the "End-
Of-Life Option"). See Notes 2 and 7.
PRIMESTAR Partners provides programming services to the Company and other
authorized distributors in exchange for a fee based upon the number of
subscribers receiving the respective programming services. In addition,
PRIMESTAR Partners arranges for satellite capacity and uplink services, and
provides national marketing and administrative support services in exchange for
a separate authorization fee.
Under the PRIMESTAR Partners limited partnership agreement, the Company has
agreed to fund its share of any capital contributions and/or loans to PRIMESTAR
Partners that might be agreed upon from time to time by the partners of
PRIMESTAR Partners. Additionally, as a general partner of PRIMESTAR Partners,
the Company is liable as a matter of partnership law for all debts of PRIMESTAR
Partners in the event the liabilities of PRIMESTAR Partners were to exceed its
assets. PRIMESTAR Partners has contingent liabilities related to legal and
other matters arising in the ordinary course of business. Management of
PRIMESTAR Partners is unable at this time to assess the impact, if any, of such
matters on PRIMESTAR Partners' results of operations, financial position, or
cash flows.
(5) SATELLITES UNDER CONSTRUCTION
The Company, through Tempo, holds a "Construction Permit" issued by the FCC
authorizing construction of a DBS system consisting of two or more satellites
delivering DBS service in 11 frequencies at the 119(degrees) W.L. orbital
position and 11 frequencies at the 166(degrees) W.L. orbital position. Tempo is
also a party to the Satellite Construction Agreement with Loral, pursuant to
which Tempo has agreed to purchase the Company Satellites at a fixed contract
price of $487,159,500, and has an option to purchase up to three additional
satellites. The cost of constructing the Company Satellites is reflected in
"Cost of satellites under construction" in the accompanying combined balance
sheets. The Company is currently pursuing two parallel strategies for deploying
the Company Satellites.
Telesat Transaction
In May 1996, subject to both American and Canadian regulatory approvals, the
Company, through Tempo, entered into agreements for the proposed arrangement
with Telesat to launch one or both of the Company Satellites into the
82(degrees) W.L. orbital position (the "Telesat Transaction"). The 82(degrees)
W.L. orbital position is a high power direct broadcast satellite slot allocated
by international agreement to Canada. The Telesat Transaction, if consummated,
provides that (i) the Company will sell the Company Satellites to Telesat in
accordance with the Satellite Purchase Agreement dated as of May 6, 1996 (the
"Satellite Purchase Agreement") between Tempo and Telesat and (ii) Telesat will
simultaneously resell 27 of the 32 transponders on the Company Satellites to
the Company, in accordance with the "Operating Services Agreement" between
Telesat and TCI Technology
F-44
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Ventures, Inc. ("TCITV"), a subsidiary of TCI, which agreement will be assigned
by TCITV to a subsidiary of the Company prior to the Distribution. It is
expected that Western Tele-Communications, Inc. ("WTCI"), a subsidiary of TCIC,
would provide uplinking and compression services in connection with any DBS
service to be operated using the transponders to be purchased from Telesat.
The purchase price (the "Satellite Purchase Price") payable by Telesat for
each Company Satellite if the Telesat Transaction is consummated is an amount
equal to the total cost of constructing, launching and placing into orbit the
Company Satellite, including capitalized interest and other financing costs
relating thereto. At the closing of the sale of each Company Satellite, in
accordance with the Operating Services Agreement, a subsidiary of the Company,
by assignment from TCITV, will purchase 27 of the 32 transponders on such
Company Satellite, for an initial payment equal to one-half of 27/32nds of the
Satellite Purchase Price for such Company Satellite, which payment will be
offset against the Satellite Purchase Price to be paid at that closing by
Telesat (and the balance of the Satellite Purchase Price remitted by the
Company to the Partnership to repay advances under the Tempo Letter Agreements
described below). Thereafter, the Company will pay Telesat a quarterly
operating fee for use of the transponders, including charges for in-orbit
insurance and tracking, telemetry and control of the Company Satellites. The
aggregate operating fee per quarter is fixed for the first 48 quarters, subject
to adjustment based on the actual Satellite Purchase Price for the Company
Satellites. If the Company continues to use the transponders after 48 quarterly
payments have been made, the Company will make quarterly payments to Telesat at
a rate equal to about one-fourth of the previous quarterly payments.
The proposed Telesat Transaction is subject to the approval of U.S. and
Canadian regulatory authorities. No assurance can be given that such regulatory
approval will be obtained or will be obtained on terms satisfactory to the
Company. On March 26, 1996, WTCI filed an application with the FCC for
authorization to construct and operate an earth station to uplink video
programming to the Company Satellites that would be launched into 82(degrees)
W.L. pursuant to the Telesat Transaction. On July 1, 1996, four cabinet-level
departments of the executive branch of the U.S. government filed the Executive
Branch Letter with the FCC recommending that the FCC treat the application as
premature and raising concerns regarding the application relating to
international agreement obligations, Canadian content restrictions, Canadian
licensing restrictions and domestic competition policy. On July 15, 1996, the
FCC dismissed WTCI's application, without prejudice, on the ground that the
application was premature because Canada has not yet issued licenses to
Telesat, which will own and operate the satellite containing the Company's
transponders to which WTCI will uplink. The FCC's order expressly did not
address any of the substantive issues raised by WTCI's application or by the
various petitions to deny WTCI's application that had been received from the
Company's competitors. The FCC indicated, however, that if WTCI refiled its
application, it would take into account concerns raised by the Executive Branch
Letter with respect to the application.
On August 14, 1996, WTCI filed a petition seeking reconsideration on the
ground that, although a formal license has not been issued, Industry Canada has
in fact issued all the pre-launch authority it customarily grants to satellite
applicants and that Telesat has received from Industry Canada its standard
support in principle for its proposal. In addition, WTCI noted that none of the
concerns raised by the Executive Branch Letter should impede grant of WTCI's
application. There can be no assurance, however, that the FCC will respond
favorably to the petition. Furthermore, although the Company believes that
WTCI's proposal is in the public interest and fully consistent with applicable
FCC rules and policies (as well as applicable treaties and international
agreements), there can be no assurance that the FCC will not deny such
application on substantive grounds when it reconsiders the matter, and the
Company cannot predict whether WTCI will ultimately receive the necessary
authorizations to operate the planned uplink station. If Telesat notifies the
Company that Telesat has obtained all government approvals and authorizations
required to be obtained by Telesat in connection with the Telesat
F-45
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Transaction, prior to the Company obtaining its required government approvals
and authorizations, Telesat would have the right to terminate the Telesat
Transaction under its agreement with the Company.
Construction of one of the Company Satellites ("Satellite No. 1") has been
completed and has been outfitted with an antenna for the 82(degrees) W.L.
orbital location. Construction of the other Company Satellite ("Satellite No.
2") has been completed except for the installation of an antenna. Loral has
advised the Company that the Company must notify Loral of the required antenna
configuration of Satellite No. 2 on or about November 1, 1996, for Satellite
No. 2 to be ready for launch by February Launch Date (defined below).
Pursuant to the "Satellite Construction Agreement" with Loral, Tempo has
arranged for two possible launches, one currently scheduled for launch on
December 19, 1996 (the "December Launch Date"), and the other scheduled for
launch on February 27, 1997 (the "February Launch Date"). In order to meet the
December Launch Date, one of the Company Satellites would have to be shipped
from Loral's facility on or about November 13, 1996. The Company is currently
in discussions with Loral and other parties with respect to the possibility of
obtaining an additional launch window in 1997 to replace the December Launch
Date. However, there can be no assurance that such a launch window can be
arranged at this time or will be available on terms acceptable to the Company.
If the Company is unable to utilize the December Launch Date or to obtain a
replacement launch window in 1997, the Company would not be able to deploy one
of the Company Satellites before 1998.
If the Company receives all necessary regulatory approvals for the Telesat
Transaction by November 1, 1996, the Company currently intends to launch
Satellite No. 1 into the 82(degrees) W.L. orbital location on the December
Launch Date. In addition, Tempo will instruct Loral to install an antenna on
Satellite No. 2 that is suitable for operation at the 91(degrees) W.L. orbital
location. In such event, Satellite No. 2 will be shipped to its launch site in
time for the February Launch Date and is expected to be deployed temporarily
into the 91(degrees) W.L. orbital position before being moved to 82(degrees)
W.L.
If the Company receives all necessary regulatory approvals for the Telesat
Transaction after November 1, 1996, but on or before November 13, 1996, then
subject to Telesat's agreeing to amend its agreements with the Company to
eliminate the references to a satellite being deployed at 91(degrees) W.L., the
Company currently intends to launch Satellite No. 1 into the 82(degrees) W.L.
orbital location on the December Launch Date. In addition, it is expected that
the Company will instruct Loral to install an antenna on Satellite No. 2 that
is suitable for operation at the 119(degrees) W.L. orbital location, Satellite
No. 2 will be shipped to its launch site in time for the February Launch Date
and will be launched into the 119(degrees) W.L. orbital location.
If all necessary regulatory approvals are not received by November 13, 1996,
or if such approvals are received but the agreements with Telesat have not been
amended as described above, Satellite No. 2 will be launched into the
119(degrees) W.L. orbital location on the February Launch Date, the December
Launch Date will be deferred with associated penalties and Tempo will place
Satellite No. 1 in storage for future launch into the 82(degrees) W.L. orbital
location or otherwise to be disposed of or deployed in such manner as the
Company and PRIMESTAR Partners may determine.
If regulatory and other conditions to the Telesat Transaction are satisfied
and the Telesat Transaction is consummated with either or both of the Company
Satellites, the Company and PRIMESTAR Partners have been discussing the
Company's making available to PRIMESTAR Partners all of the rights and benefits
(including the purchase price for the Company Satellites), and PRIMESTAR
Partners assuming all of the obligations (including the repurchase price for
the 27 transponders to be repurchased from Telesat), of the Company under
F-46
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
the agreements with Telesat. Further, if one of the Company Satellites is
launched into 119(degrees) W.L., the discussions between the Company and
PRIMESTAR Partners contemplate that the Company would make 100% of the capacity
on such satellite available to PRIMESTAR Partners and that PRIMESTAR Partners
would reimburse the Company for the costs of operating such satellite. In each
of the foregoing circumstances, the Company would be unconditionally released
from any obligation it may have to repay PRIMESTAR Partners for its funding of
the costs of constructing and launching the Company Satellites. However, if the
Company and PRIMESTAR Partners are unable to reach agreement with respect to
the foregoing, the Company will consider other potential uses for the available
capacity on the Company Satellites, which could include using such capacity in
connection with another DBS business opportunity.
Tempo DBS System.
Tempo's Construction Permit authorizes the construction of a DBS system with
11 frequency channels at 119(degrees) W.L. and 11 frequency channels at
166(degrees) W.L. The 119(degrees) W.L. position is generally visible to home
satellite dishes throughout all fifty states; the 166(degrees) is visible only
in the western half of the continental U.S. as well as Alaska and Hawaii. Under
Tempo's Satellite Construction Agreement with Loral, Loral is committed to
supply to Tempo a total of five high power satellites (including the Company
Satellites) and other items relating to such satellites. Subject to completion
of the Telesat Transaction, the Company has exercised its option under the
Satellite Construction Agreement to purchase Satellite No. 3. Under those
circumstances, Satellite No. 3 would be designated for deployment in the
119(degrees) W.L. orbital position and scheduled for launch by May 1998
pursuant to Tempo's Construction Permit.
If the Telesat Transaction is not consummated, the Company intends to deploy
one of the Company Satellites in the 119(degrees) W.L. orbital position and to
place the second Company Satellite in storage for future deployment or other
disposition as determined by Tempo.
Satellite Launches.
Pursuant to the Satellite Construction Agreement, following the launch of a
satellite, Loral will conduct in-orbit testing. Delivery of a satellite takes
place upon Tempo's acceptance of such satellite after completion of in-orbit
testing ("Delivery"). Subject to certain limits, Loral must reimburse Tempo for
Tempo's actual and reasonable expenses directly incurred as a result of any
delays in the Delivery of satellites. The in-orbit useful life of each
satellite is designed to be a minimum of 12 years. If in-orbit testing confirms
that the satellite conforms fully to specifications and the service life of the
satellite will be at least 12 years, Tempo is required to accept the satellite.
If in-orbit testing determines that the satellite does not fully conform to
specifications but at least 50% of its transponders are functional and the
service life of the satellite will be at least six years, Tempo is required to
accept the satellite but is entitled to receive a proportionate decrease in the
purchase price. If Loral fails to deliver a satellite, it has 29 months to
deliver, at its own expense, a replacement satellite. Loral may make four
attempts to launch the two Company Satellites; however, if the two Company
Satellites are not delivered in such four attempts, Tempo may terminate the
Satellite Construction Agreement. Tempo also may terminate the contract in the
event of two successive satellite failures.
Loral has warranted that, until the satellites are launched, the satellites
will be free from defects in materials or workmanship and will meet the
applicable performance specifications. In addition, Loral has warranted that
all items other than the satellites delivered under the Satellite Construction
Agreement will be free from defects in materials or workmanship for one year
from the date of their acceptance and will perform in accordance with the
applicable performance specifications. Loral bears the risk of loss of the
Company Satellites until Delivery. Upon Delivery, title and risk of loss pass
to Tempo. However, Loral is obligated to carry risk insurance on each satellite
F-47
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
covering the period from the launch of the satellite through an operating
period of 180 days. Such risk insurance will cover (i) the cost of any damages
due under the Satellite Construction Agreement; (ii) the cost of delivery of a
replacement satellite in the event of a satellite failure; and (iii) the refund
of the full purchase price for each undelivered Company Satellite if Loral
fails to deliver both Company Satellites after four attempts. Loral is also
required to obtain insurance indemnifying Tempo from any third party claims
arising out of the launch of a satellite.
Tempo Option.
In February 1990, Tempo entered into an option agreement with PRIMESTAR
Partners (the "Option Agreement"), granting PRIMESTAR Partners the right and
option (the "Tempo Option"), upon exercise, to purchase or lease 100% of the
capacity of the DBS system to be built, launched and operated by Tempo pursuant
to the Construction Permit. Under the Option Agreement, upon the exercise of
the Tempo Option, PRIMESTAR Partners would be obligated to pay Tempo $1,000,000
(the "Exercise Price") and lease or purchase the entire capacity with the
purchase price (or aggregate loan payments) being sufficient to cover the cost
of constructing, launching and operating such proposed system. In connection
with the Tempo Option and certain related matters, Tempo and PRIMESTAR Partners
subsequently entered into two letter agreements (the "Tempo Letter
Agreements"), which provided for, among other things, the funding by PRIMESTAR
Partners of milestone and other payments due under the Satellite Construction
Agreement, and certain related costs, through advances by PRIMESTAR Partners to
Tempo. PRIMESTAR Partners financed such advances to Tempo through borrowings
under the PRIMESTAR Credit Facility which was in turn supported by letters of
credit arranged for by affiliates of all but one of the partners of the
Partnership. The aggregate funding provided to Tempo by PRIMESTAR Partners is
reflected in "Due to PRIMESTAR Partners" in the accompanying combined balance
sheets. At June 30, 1996, the amount borrowed by PRIMESTAR Partners under the
PRIMESTAR Credit Facility was $433,000,000, including accrued interest. See
note 5.
The Tempo Letter Agreements permit PRIMESTAR Partners to apply its advances
to Tempo against any payments (other than the Exercise Price) due under the
Tempo Option and would not require Tempo to repay such advances unless
PRIMESTAR Partners elected to stop funding amounts due under the Satellite
Construction Agreement or failed to exercise the Tempo Option within the period
provided for in the Tempo Letter Agreements, in which event Tempo could, in
lieu of making such repayment, elect to assign all of its rights relating to
the Company Satellites to PRIMESTAR Partners.
On February 29, 1996, Tempo notified PRIMESTAR Partners of Tempo's belief
that PRIMESTAR Partners had failed to effectively exercise the Tempo Option and
that such failure had resulted in the termination of the Tempo Option pursuant
to the Tempo Letter Agreements. In that connection, Tempo advised PRIMESTAR
Partners that, based on and assuming the effective termination of the Tempo
Option, Tempo would reimburse PRIMESTAR Partners for its advances to Tempo by
assuming PRIMESTAR Partner's indebtedness for borrowed money under the
PRIMESTAR Credit Facility, to the extent used to fund such advances.
Tempo's belief that PRIMESTAR Partners failed to effectively exercise the
Tempo Option is based, among other things, on the fact that despite PRIMESTAR
Partners' notice to Tempo at the July 29, 1994 meeting of the Partners
Committee of its exercise of the Tempo Option, since such date, PRIMESTAR
Partners has failed to take any of the actions contemplated by the Option
Agreement to be taken following exercise of the Tempo Option, including (i)
advising Tempo whether it intends to purchase or lease the capacity of the DBS
system referred to in the Option Agreement, (ii) negotiating an agreement of
purchase or lease with Tempo and (iii) paying Tempo the Exercise Price.
Moreover, in December 1995, a representative of PRIMESTAR Partners informed the
Company that the July 1994 exercise of the Tempo Option had been intended as a
conditional exercise, although conditional exercises are not contemplated by
the Option Agreement, and that the conditions upon which the Tempo Option had
purportedly been exercised had not been met.
F-48
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Counsel for PRIMESTAR Partners subsequently notified Tempo that PRIMESTAR
Partners disagreed with the positions advanced by Tempo in the February 29
letter and believed that PRIMESTAR Partners has effectively and irrevocably
exercised the Tempo Option and was asserting certain rights to the Company
Satellites. Counsel for PRIMESTAR Partners also advised Tempo that PRIMESTAR
Partners would impede any attempt by Tempo to repay PRIMESTAR Partners'
advances. The Partners Committee of PRIMESTAR Partners has failed, however, to
vote to confirm that PRIMESTAR Partners has irrevocably and unconditionally
exercised the Tempo Option. The Company believes that PRIMESTAR Partners'
position is based primarily on equitable arguments relating to the advances
made by PRIMESTAR Partners to Tempo under the Tempo Letter Agreements and their
misreading of the terms of the Option Agreement and the Tempo Letter
Agreements. The Company believes the PRIMESTAR Partners' claims regarding the
Company Satellites and the Tempo Option are without merit, but there can be no
assurance that Tempo's position would prevail in the event of any litigation
regarding this controversy.
The Company and PRIMESTAR Partners are currently attempting to resolve their
disagreement regarding the Tempo Option. In that connection, the Company and
PRIMESTAR Partners have discussed the alternatives available to the Company for
deployment of the Company Satellites and the terms and provisions under which
the Company would make available to PRIMESTAR Partners 100% of the capacity of
one or more Company Satellites as so deployed. Although the Company and
PRIMESTAR Partners have not reached agreement with respect to any such
resolution of their dispute, and there can be no assurance that any such
resolution can be reached, or can be reached on terms acceptable to the
Company, the Company does currently believe that its dispute with PRIMESTAR
Partners will be resolved and does not believe that such dispute or its
resolution is reasonably likely to have a material adverse effect on the
Company.
(6) TRANSACTIONS WITH RELATED PARTIES
The effects of all transactions between the Company and TCIC have been
reflected as adjustments to the non-interest bearing intercompany account
between the Company and TCIC. For a description of certain agreements that the
Company and TCI will enter into in connection with the Distribution, see note
2.
TCIC provides certain installation, maintenance, retrieval and other customer
fulfillment services to the Company. The costs associated with such services
have been allocated to the Company based upon a standard charge for each of the
various customer fulfillment activities performed by TCIC. During the six
months ended June 30, 1996 and 1995, the Company's capitalized installation
costs included amounts allocated from TCIC of $23,319,000 and $23,485,000,
respectively. Maintenance, retrieval and other operating expenses allocated
from TCIC to the Company aggregated $10,505,000 and $7,136,000 during the six
months ended June 30, 1996 and 1995, respectively. Following the Distribution,
charges for customer fulfillment services provided by TCI will be made pursuant
to the Fulfillment Agreement. See note 2.
TCIC also provides corporate administrative services to the Company. Such
administrative expenses, which were allocated from TCIC to the Company based
primarily on the estimated cost of providing the service, aggregated $9,576,000
and $2,223,000 during the six months ended June 30, 1996 and 1995,
respectively. Following the Distribution, charges for administrative services
provided by TCI will be made pursuant to the Transition Services Agreement. See
note 2.
Certain key employees of the Company hold stock options in tandem with stock
appreciation rights with respect to certain common stock of TCI. Estimates of
the compensation related to the options and/or stock appreciation rights
granted to employees of the Company have been recorded in the accompanying
financial statements, but are subject to future adjustment based upon the
market value of the underlying TCI common
F-49
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
stock and, ultimately, on the final determination of market value when the
rights are exercised. Non-cash increases (decreases) to the Company's share of
TCI's estimated stock compensation liability, which are included in the above-
described TCIC administrative expense allocations, aggregated $(176,000) and
$209,000 during the six months ended June 30, 1996 and 1995, respectively. See
note 2.
A tax sharing agreement (the "Tax Sharing Agreement") among TCIC and certain
other subsidiaries of TCI was implemented effective July 1, 1995. The Tax
Sharing Agreement formalizes certain of the elements of a pre-existing tax
sharing arrangement and contains additional provisions regarding the allocation
of certain consolidated income tax attributes and the settlement procedures
with respect to the intercompany allocation of current tax attributes. The Tax
Sharing Agreement encompasses U.S. Federal, state, local and foreign tax
consequences and relies upon the U.S. Internal Revenue Code of 1986 as amended,
and any applicable state, local and foreign tax law and related regulations.
Beginning on the July 1, 1995 effective date, TCIC is responsible to TCI for
its share of current consolidated income tax liabilities. TCI is responsible to
TCIC to the extent that TCIC's income tax attributes generated after the
effective date are utilized by TCI to reduce its consolidated income tax
liabilities. Accordingly, all tax attributes generated by TCIC's operations
after the effective date including, but not limited to, net operating losses,
tax credits, deferred intercompany gains and the tax basis of assets are
inventoried and tracked for the entities comprising TCIC. The Company's
intercompany income tax allocation for the six months ended June 30, 1996, has
been calculated in accordance with the Tax Sharing Agreement, and is not
materially different from the intercompany allocation that would have been
calculated under the pre-existing tax sharing arrangement. In connection with
the Distribution, the Tax Sharing Agreement will be amended to provide that the
Company will be treated as if it had been a party to the Tax Sharing Agreement
effective July 1, 1995.
On February 22, 1995, the assets (primarily property and equipment) and
liabilities comprising PRIMESTAR By TCI were transferred from certain
subsidiaries of TCIC to the predecessor of TSEI. Such transfer was recorded at
TCIC's carryover basis for financial reporting purposes. In connection with
such transfer, the Company recorded an $8,527,000 non-cash increase to the
intercompany amount owed to TCIC, and an $8,527,000 non-cash decrease to the
Company's deferred tax liability.
(7) COMMITMENTS AND CONTINGENCIES
At June 30, 1996, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $56,000,000.
In 1994, the Company began to engage master sales agents (the "Master
Agents") to recruit, train and maintain a network of sub-agents to sell
services on behalf of the Company and to install, service and maintain
equipment located at the premises of the subscribers. As part of the
compensation paid for such services, the Company has agreed to pay certain
residual sales commissions equal to a percentage of the programming revenue
collected from a subscriber installed by a Master Agent during specified
periods following the initiation of service (generally five years). Residual
payments to Master Agents aggregated $4,597,000 and $400,000 during the six
months ended June 30, 1996 and 1995, respectively.
As described in note 2, TCI UA 1 has arranged for the issuance of the TCI UA
1 Letter of Credit to support the Company's pro rata share of the PRIMESTAR
Credit Facility. The amount of the TCI UA 1 Letter of Credit was $141,250,000
at June 30, 1996. In connection with the Distribution, the Company will agree
to indemnify TCI UA 1 for any loss, claim or liability that TCI UA 1 may incur
by reason of the TCI UA 1 Letter of Credit. See notes 2, 4, and 5.
F-50
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
TCIC has arranged for the issuance of a standby letter of credit to support
the Company's share of PRIMESTAR Partners' obligations under the GE-2 Agreement
with respect to PRIMESTAR Partners' use of a Replacement Satellite. The
original maximum drawable amount of such letter of credit is approximately
$25,000,000, increasing to approximately $75,000,000 if PRIMESTAR Partners
exercises the End-Of-Life Option, as described in note 4. Pursuant to one of
the Indemnification Agreements to be entered into by the Company in connection
with the Distribution, the Company will be required to reimburse TCIC for any
amounts drawn under this standby letter of credit. See note 2.
At June 30, 1996, the Company had guaranteed approximately $4,200,000 of
certain minimum commitments of PRIMESTAR Partners to purchase satellite
reception equipment.
The Company has contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
combined financial statements.
(8) SUBSEQUENT EVENTS
Sale of Proprietary Equipment to Subscribers.
Subsequent to June 30, 1996, the Company initiated a marketing program that
allows subscribers to purchase the Company's proprietary satellite reception
equipment at a price that is less than the Company's cost. The difference
between the Company's costs and the revenue generated from the sale of the
proprietary equipment, together with the related subscriber installation costs,
represent subscriber acquisition costs that will be deferred and amortized over
the estimated weighted average life of a subscriber (4 years). Any subscriber
acquisition costs that have not been fully amortized at the time service to a
subscriber is terminated will be charged to amortization expense during the
period in which such termination occurs.
Resnet Transaction
Effective as of October 21, 1996, the Company acquired 4.99% of the issued
and outstanding capital stock of ResNet Communications, Inc., a Delaware
corporation ("ResNet"). ResNet was formed by LodgeNet Entertainment
Corporation, a Delaware corporation, in February 1996 to engage in the business
of providing video services to subscribers in multiple dwelling units (the
"ResNet Business"). ResNet agreed to purchase from the Company up to $40
million in satellite reception equipment to be used in connection with the
ResNet Business exclusively, over a five year period (subject to a one-year
extension at the option of ResNet if ResNet has not purchased the full $40
million in equipment during the five-year initial term). The Company also
agreed to make a subordinated convertible term loan to ResNet, the proceeds of
which can be used only to purchase such equipment from the Company. The term of
the loan is five years with an option by ResNet to extend the term for one
additional year. The total principal and accrued and unpaid interest under the
loan is convertible over a four-year period into shares of common stock of
ResNet that will provide the Company with the right to acquire an additional
32% of the issued and outstanding common stock of ResNet. The Company's only
recourse with respect to repayment of the loan is conversion into ResNet stock
or warrants as described below. Under current interpretations of the FCC rules
and regulations related to restrictions on the provision of cable and satellite
master antenna television services in certain areas. The Company could be
prohibited from holding 5% or more of the stock of ResNet and consequently
could not exercise the conversion rights under the convertible loan agreement.
The Company is required to convert the convertible loan at such time as
conversion would not violate such currently applicable regulatory restrictions.
In addition, ResNet granted the Company an option to acquire an additional
13.01% of the issued and outstanding common stock of ResNet at appraised fair
market
F-51
<PAGE>
"TCI SATCO"
(A COMBINATION OF CERTAIN SATELLITE TELEVISION
ASSETS OF TCI COMMUNICATIONS, INC., AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
value at the time of exercise of the option. The option is exercisable between
December 21, 1999 and the maturity of the convertible loan. Upon the maturity
date of the convertible loan, if the Company has been prevented from converting
the loan or exercising the option in full due to the previously described
regulatory restrictions, ResNet will issue warrants to the Company to acquire
the stock that has not been issued pursuant to conversion of the loan and the
stock that the Company has a right to acquire by exercise of the option. The
exercise price of the warrants will be de minimis, and the exercise price of
the warrants to be issued in respect of the option will be equivalent to the
exercise price under such option. The Company has agreed to customary
standstill provisions with respect to acquisitions of more than 10% of the
outstanding stock of LodgeNet and any additional shares of ResNet.
The Company also entered into a long-term signal availability agreement with
ResNet, pursuant to which the Company will transport to certain defined private
cable systems owned and operated by ResNet, the satellite signal used by
PRIMESTAR Partners to transmit the PRIMESTAR(R) programming service (the
"PRIMESTAR Satellite Signal") or the signal of a substantially comparable
service. The Company is acting solely to make the PRIMESTAR Satellite Signal
available to ResNet and is not acting as a distributor of any PRIMESTAR(R)
programming services to ResNet. ResNet must obtain its own rights from the
applicable programming networks to receive the programming services and to
distribute them to ResNet's subscribers. WTCI has the right from PRIMESTAR
Partners to use the PRIMESTAR Satellite Signal for delivery of programming for
the benefit of third parties, including private cable systems (the
"Simultaneous Use Rights"). WTCI has agreed with the Company that private cable
systems designated by the Company, including the ResNet private cable systems,
will receive the transport of the PRIMESTAR Satellite Signal by WTCI in
exchange for the payment by the Company of a per subscriber per video program
signal. The agreement between the Company and WTCI is coexistive with the
agreement between WTCI and PRIMESTAR Partners expiring on March 31, 2001, and
there is no assurance that the Company will continue to have the ability to
make the PRIMESTAR Satellite Signal available after that date. In its agreement
with ResNet, the Company has committed to make the PRIMESTAR Satellite Signal
or the signal of a substantially comparable service available for a term that
extends substantially beyond March 31, 2001. If the Company loses its
contractual ability to make the PRIMESTAR Satellite Signal available and is not
able to make the signal of a substantially comparable service available, the
Company is obligated to reimburse ResNet for its costs in obtaining a digital
signal from another source, including the cost of replacement equipment if the
new digital signal is not comparable with ResNet's equipment. While it is not
possible at this time to quantify the amount that the Company would be
obligated to pay to ResNet under the circumstances described above, the Company
believes that the costs could be significant, particularly if it were to lose
its ability to make a signal available towards the end of its agreement with
ResNet.
Counsel to PRIMESTAR Partners has advised the Company of the Partnership's
position that there are certain preconditions to WTCI's Simultaneous Use Rights
which have not yet been satisfied and that such rights are not assignable by
WTCI to the Company. The Company believes that its transaction with ResNet and
similar transactions are permitted under the agreements between WTCI and
PRIMESTAR Partners. The Company does not believe that any potential dispute
with the Partnership regarding this issue is likely to have a material adverse
effect on the Company.
F-52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
PRIMESTAR Partners, L.P.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in partners' capital and of cash flows present fairly,
in all material respects, the financial position of PRIMESTAR Partners, L.P.
at December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As described in Note 2 to the
financial statements, the Partnership has suffered recurring losses from
operations and its 1996 operating budget reflects cash requirements in excess
of the current aggregate capital commitment of its partners. These matters
raise substantial doubt about the Partnership's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
March 11, 1996, except as to Note 16,
which is as of April 25, 1996
F-53
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
BALANCE SHEET
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents.................... $ 10,956 $ 25,970
Restricted cash........... 689 391
Accounts receivable, re-
lated parties, net....... 60,444 12,199
Prepaid and other current
assets................... 549 1,196
--------- ---------
Total current assets.... 72,638 39,756
Property and equipment,
net........................ 9,990 7,703
Costs of satellites under
construction (notes 6 and
15)........................ 419,256 289,607
Deposits.................... 73 830
Deferred financing fees,
net........................ 684 1,262
Other assets, net........... 13,321 4,917
--------- ---------
$ 515,962 $ 344,075
========= =========
LIABILITIES AND PARTNERS'
CAPITAL
Current liabilities:
Accounts payable and other
accrued expenses......... $ 33,822 $ 14,621
Accrued payroll........... 2,373 1,222
Accrued interest.......... 1,716 1,238
--------- ---------
Total current liabili-
ties................... 37,911 17,081
Borrowings under long-term
credit facility............ 419,000 290,000
Deferred rent--related par-
ty......................... 7,210 11,178
--------- ---------
Total liabilities....... 464,121 318,259
--------- ---------
Commitments and contingen-
cies
Partners' capital:
Contributed capital....... 251,968 183,906
Accumulated loss.......... (200,127) (158,090)
--------- ---------
Total partners' capi-
tal.................... 51,841 25,816
--------- ---------
$ 515,962 $ 344,075
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Subscriber revenues, related parties............ $180,595 $ 27,841 $ 10,861
Interest........................................ 1,252 405 131
-------- -------- --------
181,847 28,246 10,992
-------- -------- --------
Expenses:
Operating....................................... 147,948 41,832 22,469
Selling, general and administrative............. 68,152 36,343 15,964
Depreciation and amortization................... 2,890 2,700 1,849
Interest expense................................ 8 61
Loss on deferred option payments................ 4,886 1,767
Loss on disposal of property and equipment...... 1,259
-------- -------- --------
223,884 83,962 40,282
-------- -------- --------
Net loss.......................................... $(42,037) $(55,716) $(29,290)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
CONTRIBUTED ACCUMULATED
CAPITAL LOSS TOTAL
----------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1992................. $ 71,206 $ (73,084) $ (1,878)
Capital contributions........................ 34,400 34,400
Net loss..................................... (29,290) (29,290)
-------- --------- --------
Balance at December 31, 1993................. 105,606 (102,374) 3,232
Capital contributions........................ 78,300 78,300
Net loss..................................... (55,716) (55,716)
-------- --------- --------
Balance at December 31, 1994................. 183,906 (158,090) 25,816
Capital contributions........................ 68,062 68,062
Net loss..................................... (42,037) (42,037)
-------- --------- --------
Balance at December 31, 1995................. $251,968 $(200,127) $ 51,841
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (42,037) $ (55,716) $(29,290)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 2,890 2,700 1,849
Loss on deferred option payments............. 4,886 1,767
Loss on disposal of property and equipment... 1,259
Change in assets and liabilities:
Accounts receivable, related parties........ (48,245) (10,379) (570)
Deposits.................................... 757 (808)
Prepaid and other assets.................... (13,024) (1,220) (564)
Accounts payable, accrued expenses, and
accrued interest........................... 20,830 10,611 1,299
Deferred rent............................... (3,968) (2,598) (590)
--------- --------- --------
Net cash used in operating activities...... (77,911) (54,384) (27,866)
--------- --------- --------
Cash flows from investing activities:
Purchase of property and equipment and
payments
on satellite construction.................... (133,867) (224,097) (72,336)
--------- --------- --------
Cash flows from financing activities:
Increase in deferred financing fees........... (1,573) (160)
Loans from partners........................... 48,184 71,164
Repayment of loans from partners.............. (119,348)
Capital contributions......................... 68,062 78,300 34,400
Borrowings under credit facility.............. 129,000 290,000
Increase in restricted cash................... (298) (391)
--------- --------- --------
Net cash provided by financing activities.. 196,764 295,172 105,404
--------- --------- --------
Net (decrease) increase in cash and cash
equivalents................................... (15,014) 16,691 5,202
Cash and cash equivalents at beginning of
year.......................................... 25,970 9,279 4,077
--------- --------- --------
Cash and cash equivalents at end of year....... $ 10,956 $ 25,970 $ 9,279
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION AND BUSINESS
Formation:
PRIMESTAR Partners, L.P. (the Partnership), was formed on February 8, 1990 as
a Delaware limited partnership.
The purpose of the Partnership is to engage in the business of acquiring,
originating and/or providing television programming services delivered by
satellite to subscribers through a network of distributors throughout the
continental United States. Presently, there are approximately 630 such
distributors, all of which are owned by the Partnership's partners.
Capital contributions:
In accordance with the limited partnership agreement (the Agreement), capital
contributions by the partners are required as follows:
. Cash contributions: Nine of the Partnership's ten partners made initial
contributions of an aggregate $38,000 in cash. Eight of those nine
partners and one former partner have contributed an additional aggregate
$207,300 in cash as of December 31, 1995 and have agreed to make minimum
additional aggregate cash contributions of $24,000 (see note 17).
. In-kind contribution: In return for an initial 15% ownership interest in
the Partnership, a partner leased certain satellite transponders to the
Partnership at below market rates. This in-kind contribution was
recorded at its estimated fair market value of $6,700 as of the
inception of the Partnership. (See notes 7 and 12.)
Distributions and allocations:
Net profits and net losses are allocated to each partner in accordance with
their stated percentage ownership interests, as defined by the Agreement. The
amount of annual cash distributions, if any, is determined by the Partners
Committee. Such distributions are made to the partners on a pro rata basis, in
accordance with partners' respective stated percentage ownership interests as
of the date of such distributions. Liquidation distributions and distributions
of any net proceeds from capital transactions are made pro rata to partners
with positive capital account balances (as defined), until such balances have
been reduced to zero; the balance of such distributions, if any, is distributed
pro rata in proportion to the partners' stated percentage ownership interests.
For purposes of all distributions and allocations, respective partners'
percentage ownership interests are determined as outlined in the Agreement.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY
Basis of accounting and liquidity:
The Partnership prepares its financial statements on the accrual basis of
accounting. The financial statements have been prepared assuming that the
Partnership will continue as a going concern. The Partnership has suffered
recurring losses from operations and its 1996 operating budget reflects cash
requirements which are in excess of the current aggregate capital commitment of
its partners. These matters raise substantial doubt about the Partnership's
ability to continue as a going concern. Management believes that the
Partnership has adequate capital to continue normal operating activity through
approximately May 1996. (See note 17.) Presently, the partners determine the
amount of additional capital commitments on a quarterly basis.
F-58
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
Revenue recognition:
Subscriber revenues are billed to distributors and recognized when related
programming services are delivered. Included in accounts receivable at December
31, 1995 and 1994 is $27,244 and $5,811, respectively, of unbilled programming
services.
Cash and cash equivalents and restricted cash:
Cash and cash equivalents are defined as short-term, highly liquid
investments with original maturities of three months or less. Restricted cash
represents unexpended borrowings under the credit facility which must be used
for the satellite construction project and interest and fees associated with
the credit facility.
Property and equipment:
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives of the assets (5-7 years) using the straight-line
method. Maintenance and repairs are expensed as incurred and the cost of
betterments are capitalized.
Intangible assets:
The intangible asset associated with the in-kind capital contribution is
being amortized over the term of the related lease agreement (see note 7).
Deferred financing fees:
Deferred financing fees of $1,732 at December 31, 1995 and 1994, relate to
securing of the credit facility associated with the satellite construction
project (see note 8). Fees are being amortized over the life of the credit
facility. Amortization expense was $577 and $470 for the years ended December
31, 1995 and 1994, respectively. See note 6 regarding capitalization of
deferred financing fees.
Income tax reporting:
Federal and state income taxes are payable by the individual partners;
therefore, no provision or liability for income taxes is reflected in the
financial statements. Differences between bases of assets and liabilities for
tax and financial reporting purposes result primarily from expensing of option
payments, capitalization of startup costs and recognition of expense relating
to operating leases for tax purposes.
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Long-lived assets:
The Partnership plans to adopt Statement of Financial Accounting Standards
No. 121 (FAS 121), "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of" in 1996. FAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain intangibles to be
F-59
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
disposed of. Under FAS 121, the Partnership will periodically review its long-
lived assets to assess recoverability through a non-discounted cash flow
analysis and any perceived impairment will be charged to operations in the
period such impairment becomes evident. The Partnership does not expect a
material effect to result from the adoption of FAS 121.
(3) ACCOUNTS RECEIVABLE--RELATED PARTIES
Accounts receivable, related parties, represent amounts due from
distributors, all of whom are owned by the partners, for programming services.
The partners and distributors are engaged in the business of providing
television programming through cable and satellite to subscribers. Sales to the
5 largest of these distributors represented approximately 9%, 11% and 17% of
the Partnership's subscriber revenues for 1995, 1994 and 1993, respectively.
The allowance for doubtful accounts was $812 and $146 at December 31, 1995 and
1994, respectively.
(4) NOTES RECEIVABLE
On November 15, 1990, the Partnership assumed from a partner two revolving
credit promissory notes (the "Notes") related to amounts due from a third
party. In connection with the assumption, the Partnership agreed to reimburse
the partner for the total of all advances made to date under the Notes plus
accrued interest on such advances at a rate of 10% per annum. Such
reimbursement totaled approximately $767 and was paid in January 1991. The
Partnership also advanced approximately $151 to the third party. Because of
uncertainty regarding the ultimate collectibility of aggregate advances, the
Company had recorded a reserve for the full amount of the notes.
Under the terms of the revolving credit promissory note with one of the third
parties, the principal balance and all unpaid, accrued interest is due and
payable in the event the third party enters into an agreement to transfer its
DBS construction permit or license. During 1994, one of the third parties
entered into an agreement to transfer the permit and, as a result, in 1995, the
Partnership recovered $450 representing principal of $375 and interest of $75
through the repayment date. The balance of the remaining Note and related
reserve as of December 31, 1995 is approximately $543.
(5) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and 1994 comprise the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Construction-in-progress--engineering laboratory........... $ 416
Control center, compression equipment...................... 7,807 $ 6,082
Other furniture and equipment.............................. 5,540 3,463
------- -------
13,763 9,545
Accumulated depreciation................................... (3,773) (1,842)
------- -------
$ 9,990 $ 7,703
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993 was
$1,932, $1,271 and $891, respectively.
(6) COSTS OF SATELLITES UNDER CONSTRUCTION
In 1993, through various arrangements entered into with and by a wholly-owned
subsidiary of a partner (the "Related Party"), the Partnership obtained the
rights to a fixed price contract with Space Systems/Loral, Inc. for the
F-60
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
construction and launch of two satellites. Under that arrangement, each
satellite could be constructed either as a Fixed Satellite Service (FSS) or
Broadcast Satellite Service (BSS) system and would provide the Partnership in
the range of 100-200 channels. The expected cost of the three year construction
and subsequent launch of the satellites was to range from $450,000 to $482,000
(excluding capitalized interest), depending on whether the satellites were
ultimately finished as FSS or BSS spacecraft. Under the Partnership's original
plan, receipt of necessary authorizations from the Federal Communications
Commission ("FCC") for orbital locations desired by the Partnership would be
the major factor which determined the satellites' final construction specifics.
As discussed in note 7, the Partnership has discontinued the dual build program
and has decided to build two BSS satellites. Through December 31, 1995 and
1994, the Partnership has reimbursed the Related Party $382,900 and $278,772,
respectively, for the construction of the satellites (see note 15).
The total amount of interest cost (including amortization of deferred
financing fees and commitment fees) capitalized in conjunction with the
satellite construction project for the years ended December 31, 1995, 1994 and
1993 was $25,521, $10,432 and $403, respectively.
Satellites are subject to significant risks, including manufacturing defects
affecting the satellite or its components; launch failure resulting in damage
to, or destruction of, the satellite, or incorrect orbital placement; and
damage in orbit caused by asteroids, space debris or electrostatic storms. Such
factors may prevent or limit commercial operation or reduce the satellite's
useful life.
The satellite currently being used by the Partnership is nearing the end of
its operational life, and is expected to be ultimately replaced by another
medium power satellite that an affiliate of a Partner expects to launch in
January 1997, to be operational 30 to 60 days thereafter (See Note 7). In
November 1996, the current satellite is expected to be temporarily replaced by
another existing medium power satellite.
Limited on-board fuel capacity is a major factor limiting the useful life of
satellites. When on-board fuel supplies get low, a satellite may be placed into
inclined orbit to extend its useful life for an additional period. The
Partnership expects the temporary satellite it will be using in January 1997
could begin inclined orbit operations as early as January 1997 and continue for
a period of five months thereafter. If the medium power satellite scheduled for
launch in January 1997 is unavailable, the continued usage of the temporary
satellite will likely result in subscribers experiencing unacceptable outage
levels commencing in the month of June 1997. In this circumstance, a delay in
the launch of the medium power satellite in January 1997 could have a material
adverse effect on the Partnership. However, it is reasonably possible that the
temporary satellite may not be required to be placed into inclined orbit until
May 1997. In such case, a delay of less than 2-3 months the launch of the
medium power satellite in January 1997 may not have an adverse effect on the
Partnership.
(7) OTHER ASSETS
Other assets at December 31, 1995 and 1994 comprise the following:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Bargain element of transponder lease (see note 12)......... $ 6,706 $ 6,706
Less: accumulated amortization............................. (5,747) (4,790)
------- -------
Net...................................................... 959 1,916
Deferred option payments................................... 3,001
Prepaid transponder space.................................. 12,362
------- -------
$13,321 $ 4,917
======= =======
</TABLE>
F-61
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
In 1990, the Partnership entered into an option agreement with the Related
Party. The Related Party ultimately became a FCC authorized BSS satellite
licensee with a permit to construct and operate BSS satellites within an 11
channel authorization. The option agreement requires the Partnership to pay the
Related Party actual costs incurred by the Related Party related to the
agreement, not to exceed $2,000. Under the option agreement, the Partnership
retains exclusive rights to lease or purchase all channel capacity in satellite
locations allocated to the Related Party under the FCC permit. Within 120 days
of the exercise of the option, the Partnership shall pay an additional $1,000
to the Related Party and use its best efforts to negotiate and execute an
agreement to lease or buy the channel capacity. The Partnership is also
required to pay the Related Party $1,000 if the Partnership leases, acquires or
enters into a legally binding commitment or option for similar channel capacity
from another party without exercising the option with the Related Party. Since
the option agreement is considered an integral part of the Partnership's
strategy to upgrade the distribution of its programming from the low-powered
satellite presently in use to high-power satellite technology, cumulative
payments under the option agreement are capitalized and are to be assigned to
the cost of the leased or purchased channel capacity and amortized over the
life of the leased or purchased asset.
In 1994, an affiliate of the Related Party entered into a proposed merger
agreement with another FCC BSS licensee which controlled a BSS construction
permit and 27 channel authorization at another location. The Partnership agreed
to reimburse and otherwise make the Related Party whole for the associated
cost, interest and tax expense incurred by the Related Party (whether by merger
or by lease) in having the 27 channel capacity available for its use. Through
December 31, 1995, the Partnership has capitalized as reimbursement of costs to
the Related Party approximately $4,900, of which $4,600 remains in accounts
payable. Costs related to this transaction were to be assigned to the cost of
the leased or purchased channel capacity.
Based on representations made by the Related Party (and its affiliates), the
Partnership, as a beneficiary in this transaction, formally resolved in 1994 to
(1) elect that its K-1 successor satellite program (see note 6) would be at BSS
with the utilization of either the 11 or 27 channel authorizations; (2)
terminate the FSS/BSS dual build program; and (3) subject to certain
conditions, to reimburse the Related Party for the associated cost, interest
and tax expense incurred by the Related Party (whether by merger or lease) in
having the 27 authorizations available for the Partnership's use.
As a result of the above, management determined that it is unlikely that the
Partnership will pursue channel capacity at both satellite locations.
Accordingly, approximately $1,800 was established as a reserve on amounts
capitalized under the agreement in 1994.
In October 1995, the FCC terminated the license held by the FCC BSS licensee
and subsequently sold such license at public auction to another party. The
Partnership, the Related Party and the BSS licensee are currently engaged in
appeal of the FCC's decision. (See note 17.) Accordingly, approximately $4,900
was established as a reserve on amounts capitalized under the agreement in
1995.
In 1995, the Partnership entered into an agreement with an affiliate of a
Partner for the lease of transponder space beginning in 1997 on an unlaunched
satellite. Payments of $12,362 were made in 1995 and recorded in other assets
and additional payments of $16,198 will be made in 1996. Prior to October 1996,
subject to the occurrence of certain events, the Partnership may cancel the
agreement with a refund of all payments made.
(8) CREDIT FACILITY
On March 9, 1994, the Partnership entered into a $565,000 credit facility
with a consortium of 25 banks to provide financing for the construction and
launch of the satellites as described in note 6. The facility matures June 30,
1997
F-62
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
and borrowings are collateralized by letters of credit issued by each of the
general partners (or an affiliate) (the Partners/Partner Affiliates)(see note
15). Borrowings bear interest, at the option of the Partnership, at a rate per
annum equal to any of the following:
1. The greater of the following (the "Alternate Base Rate")
(i) The prime rate of Chemical Bank
(ii) The weighted average of the rates for overnight funds plus 0.5%;
or
(iii) The secondary market rate for three-month certificates of
deposit plus 1%;
2. The sum of (a) 7/16% plus (b) LIBOR for interest periods of one, two,
three, six or, if made available by each of the banks, twelve months; or
3. The sum of (a) 9/16% plus (b) the CD rate for certificates of deposit
having a term of 30, 60, 90 or 180 days.
Interest is payable, to the extent bearing interest based on the Alternate
Base Rate, quarterly, in arrears and to the extent bearing interest based on
LIBOR or the CD rate, on the last day of the applicable interest period (and,
in the case of a CD or LIBOR rate loan having an interest period longer than 90
days or three months, respectively, at intervals of 90 days and three months,
respectively, after the first day of such interest period). Borrowings and
prepayments shall be in the amount of $5,000 in the case of LIBOR and CD rate
loans and $1,000 in the case of Alternate Base Rate loans, or in each case, any
greater multiple of $1,000. The Partnership will pay quarterly, in arrears, a
commitment fee of 3/16% per annum on the daily unused portion of the facility.
At December 31, 1995 and 1994, borrowings outstanding totaled $419,000 and
$290,000, respectively, which bear interest at rates ranging from 6.13% to
7.88% and mature at varying dates through March 28, 1996 (subsequently extended
through June 1996). As borrowings mature, the Partnership intends to refinance
them under the same facility as provided by the agreements, therefore,
borrowings have been classified as long-term (see note 15).
Interest expense for the years ended December 31, 1995 and 1994 totaled
$24,511 and $8,435, respectively. Commitment fees for the years ended December
31, 1995 and 1994 totaled $419 and $573, respectively. The interest expense and
commitment fees were capitalized into costs of satellites under construction.
(9) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that are subject to fair value disclosure requirements
are carried in the financial statements at amounts that approximate fair value.
The fair value of the Partnership's borrowings under the credit facility was
estimated based on the quoted market prices for the same or similar issues or
on the current rates offered to the Partnership for debt of the same remaining
maturities at December 31, 1995 and 1994, respectively.
(10) NOTES PAYABLE, RELATED PARTIES
The Partnership entered into Promissory Notes, payable to the Partners/
Partner Affiliates of the Partnership for the purpose of providing bridge
financing for the construction and launch of up to two satellites (see note 6).
The total amount of the Notes entered into was $48,184 during 1994. In March
1994, these Notes and related interest of $1,400 were repaid in full with
borrowings under the credit facility described in note 8.
(11) RELATED PARTY TRANSACTIONS
A subsidiary of a partner provides satellite uplink services to the
Partnership. Total payments for such services were approximately $10,581,
$5,610 and $1,282 in 1995, 1994 and 1993, respectively.
F-63
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
See notes 1, 2, 3, 4, 6, 7, 8, 10, 12, 15 and 17 for additional related
party transactions.
(12) COMMITMENTS
The Partnership has long-term lease commitments for office space, equipment
and transponders (see note 7) which are accounted for as operating leases.
At December 31, 1995, future minimum lease payment commitments under these
leases, excluding amounts described in note 7, are as follows:
<TABLE>
<CAPTION>
YEAR TRANSPONDERS OTHER
---- ------------ ------
<S> <C> <C>
1996..................................................... $30,800 $1,368
1997..................................................... 1,391
1998..................................................... 1,387
1999..................................................... 794
2000..................................................... 242
------- ------
Total minimum rentals.................................. $30,800 $5,182
======= ======
</TABLE>
The transponder lease arrangement provides for fixed payments, as well as
payments which escalate over the term of the lease; further, the agreement
provides for a deferral of payments until later years. The Partnership
recognizes the expense related to this agreement by amortizing the total
commitments on a straight-line basis. Deferred rent-related party in the
accompanying balance sheet represents the difference between the straight-line
amortization and cash payments.
In addition to the fixed minimum rentals above, the transponder lease
includes variable charges, based upon the number of subscribers to the
Partnership's programming service, of one dollar per subscriber per month for
all subscribers up to and including 750,000 subscribers, fifty cents per
subscriber per month for all subscribers over 750,000 up to a maximum of
2,000,000 subscribers, and no variable charge with respect to any subscribers
over 2,000,000. Such variable charges for the years ended December 31, 1995,
1994 and 1993 were approximately $5,550, $1,035 and $660, respectively.
Rent expense under operating leases for the years ended December 31, 1995,
1994 and 1993 was approximately $23,500, $22,208 and $16,730, respectively.
The Partnership has commitments to purchase equipment for use by its
subscribers in receiving satellite transmissions. At December 31, 1995, future
minimum purchase commitments under this agreement, which certain of the
Partners have guaranteed, are approximately $12,000.
(13) BENEFIT PLANS
In 1991, the Partnership established a 401(k) Retirement Savings Plan
covering substantially all employees who have completed one year of service.
The Plan permits eligible employees to contribute up to 10% of their annual
pre-tax compensation and the Partnership makes matching contributions of up to
50% of participants first 5% of annual pre-tax compensation. The Partnership
may also make discretionary contributions to the Plan. The Partnership's
contributions to the Plan for the years ended December 31, 1995, 1994 and 1993
totaled approximately $80, $61 and $53, respectively.
F-64
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
In 1995, the Partnership adopted a Long-Term Incentive Compensation Program
for senior management. The program awards units with a value of $1 based upon
meeting certain performance objectives. Awarded units vest pro rata at the end
of years three through five subsequent to the year of award. As of December 31,
1995, 2,115 units have been awarded with a value of $2,115 of which
approximately $471 represents compensation expense through December 31, 1995.
No units are vested at December 31, 1995. Unit holders have the option to
convert all or a part of their accumulated and unpaid awards to common stock at
the initial offering price in the event of a public offering for the
Partnership.
(14) LITIGATION AND CONTINGENT LIABILITIES
The Antitrust Division of the Department of Justice and the antitrust bureaus
of several states began a formal investigation into the affairs of the
Partnership in 1990. The Partnership complied with the discovery demands and
cooperated in the investigations. On June 9, 1993, complaints and consent
judgments were filed by the Department of Justice and the attorneys general of
forty states in the federal court for the Southern District of New York
alleging violations of federal and state antitrust law by the Partnership and
the partners in PRIMESTAR Partners. Five additional states and the District of
Columbia filed similar complaints in the same court on August 18, 1993. The
defendants agreed to settle the allegations in all the complaints for, and the
Partnership paid, $4,750, without any admission of wrongdoing. Final consent
judgments were entered by the District Court (over the objections of certain
third parties and attempted intervenors) in all of the state actions on
September 14, 1993. The time to appeal the judgments in the state actions has
expired. The final consent judgment in the Department of Justice matter was
entered by the District Court (over the objections of certain third parties) on
April 5, 1994. The time to appeal the judgment expired on June 4, 1994.
On March 16, 1994, the Partnership received a Civil Investigative Demand
(CID) from the Antitrust Division of the Department of Justice (DOJ) relative
to the DOJ's investigation of "agreements in restraint of trade and attempted
monopolization in markets relating to the delivery of analog and digital video
programming." The CID issued by the DOJ does not identify the Partnership as
the subject of the investigation or indicate the entities being investigated as
possible participants in the alleged agreements. Management does not believe
that the Partnership has engaged in any unlawful conduct. The Partnership,
nonetheless, cooperated with the DOJ in its investigation and provided certain
documents, responded to interrogatories proposed by the DOJ and made certain
employees available for depositions. Although the DOJ staff preliminarily found
a Section 1 Sherman Act violation in July, 1995, upon further review, the DOJ
informed the Partnership on January 24, 1996 that it had concluded that it
would not take any further action at that time nor did it presently intend to
institute any legal proceedings against the Partnership. The DOJ further
informed the Partnership that the investigation would remain open and that it
would continue to monitor developments in this area.
The Partnership, along with several other satellite carriers, is in
discussion with national broadcast television networks and their affiliates
concerning compliance with the Satellite Home Viewer Act of 1994 which amended
the Satellite Home Viewer Act of 1988. At present, those discussions which
focus on reporting and signal measurement issues do not appear to involve any
matter that would constitute a material loss contingency. In complying with the
Act, the Partnership is required to discontinue network service to certain of
its subscribers who are able to receive network services over-the-air. The
Satellite Home Viewer Act, as amended, does provide for remedies for
infringement under the Copyright Act of 1976, as amended, under certain
circumstances. The remedies are per claim and such remedies can include actual
damages, injunctions, and statutory damages. Statutory damages per claim are
limited to five dollars per subscriber per month or $250 in a six-month period.
At present, the Partnership is unable to determine
F-65
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
upon what basis such damages would be calculated or what their amount might be;
however, the Partnership has received approximately 114,000 challenges from 350
network affiliates. Currently, in response to such challenges, the Partnership
has disconnected 40,000 subscribers. None of the networks or affiliates has
asserted any claim for damages under applicable law against the Partnership.
Management is unable at this time to assess the impact, if any, of the
unasserted claim on the Partnership's results of operations, financial position
or cash flows.
See notes 15, 16 and 17.
(15) SUBSEQUENT EVENT--TEMPO OPTION AGREEMENT
On February 29, 1996, the Partnership received notification from the Related
Party which notification positioned that, assuming the Tempo Option Agreement
dated February 8, 1990 had expired, the Related Party: a) had determined to
proceed with a direct broadcast satellite system under the BSS Construction
Agreement between the Related Party and Space Systems/ Loral (see note 6); b)
had issued a stop work order under the BSS Construction Agreement; c) would
reimburse the Partnership for progress payments, milestone payments and
termination liability payments under the BSS Construction Agreement as well as
payments to Telesat or a similar organization under the BSS Construction
Agreement for consulting and monitoring services; d) would hold the Partnership
and its partners harmless for all indebtedness for amounts borrowed by the
Partnership under its credit facility to the extent used to fund such payments
(see note 8); and e) would arrange for the cancellation of all promissory notes
and/or other instruments evidencing such indebtedness and the release of all
letters of credit posted by the Partnership or any Funding Partner. The
Partnership believes that the Related Party's assumption that the Option
Agreement has terminated is without foundation and directed the Related Party
to withdraw any stop work order that has been issued. (Management's
understanding, based on representations made by the Related Party, is that the
stop work order was immediately rescinded after its issuance.) The Partnership
subsequently informed the Related Party that it intends to continue to make
payments related to the satellite construction program, and, to the extent not
invoiced, the Partnership will make payments of amounts it estimates in good
faith will otherwise be due.
The Partnership and the Related Party have exchanged additional
correspondences detailing the legal and factual basis for their respective
claims, with the Partnership taking the position that, notwithstanding the
Related Party's assertion, the Option Agreement has in fact been exercised
unconditionally. At present, neither the Related Party or the Partnership have
indicated what next steps will be taken in this matter. Therefore, management
is unable at this time to assess the impact, if any, of this matter on the
Partnership's results of operations or financial position or cash flows.
(16) SUBSEQUENT EVENTS--LITIGATION AND CONTINGENT LIABILITIES
On April 16, 1996, the Partnership was served with a complaint from a third
party, now pending in the United States District Court. The Plaintiff claims
that the Partnership has infringed a patent on an "audio storage and
distribution system," supposedly involving the Partnership's digital satellite
TV systems. No specific amount of damages is claimed, but the plaintiff
requests compensatory damages (trebled), attorneys' fees and costs, and
injunctive relief. This is one of at least 18 similar cases pending against
different defendants. The Partnership has made a claim for indemnification
against a subsidiary of the equipment provider, which sold the systems in
question to the Partnership. Management is unable at this time to assess the
impact, if any, of the aforesaid claim on the Partnership's results of
operations or financial position or cash flows.
F-66
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
On April 25, 1996, the Partnership received oral notification of a claim from
a third party for alleged patent infringement in an unspecified amount or, in
the alternative, a claim for past and future license fees in an amount to be
negotiated, arising out of the Partnership's (and its distributors) utilization
of DigiCipher Equipment for the provision of the Partnership's service to its
distributors (and their customers). The Partnership intends to make a claim for
indemnification against the supplier of the DigiCipher Equipment to the
Partnership. Management is unable at this time to assess the impact, if any, of
the aforesaid claim on the Partnership's results of operations or financial
position or cash flows.
(17) UNAUDITED SUBSEQUENT EVENTS
SUBSEQUENT CAPITAL CONTRIBUTIONS AND BORROWINGS:
The Partnership received an additional $53,000 in capital contributions
during the period from January 1, 1996 though September 30, 1996. The
Partnership also borrowed an additional $26,000 under its line of credit during
the period from January 1, 1996 through October 25, 1996. The notes payable
which matured through September 1996 have been extended to various dates
through December 1996. The Partners Committee approved an additional capital
contribution, on October 1, 1996 of $10,000, payable November 4, 1996. With
this capital contribution management currently believes that the Partnership
has adequate capital to continue normal operating activity through January
1997.
LITIGATION AND CONTINGENT LIABILITIES:
As described in Note 14, in complying with the Satellite Home Viewer Act of
1994, the Partnership is required to discontinue network service to certain of
its subscribers who are able to receive network services over the air. Through
September 1996, the Partnership has received approximately 350,000 challenges
from 375 network affiliates. In response to such challenges, the Partnership
has disconnected 70,000 subscribers. None of the networks or affiliates has
asserted any claim for damages under applicable law against the Partnership.
However, public announcements by the National Association of Broadcasters,
representing the affiliates and networks, indicate an intention to initiate
legal action against violators to enforce the Satellite Home Viewers Act of
1988, as amended. However, discussions are continuing between representatives
of the Partnership and representatives of the networks and their affiliates
concerning reporting and signal measurement issues under the Act. Management
believes it is possible that those discussions will yield an agreement
resolving those issues. In that event, management believes that it is unlikely
that the networks and their affiliates will initiate litigation against the
Partnership. In the event those discussions are not successful, management
believes it is likely that the networks and their affiliates will initiate
litigation against the Partnership. The Act provides for remedies which can
include actual damages, injunctions, and statutory damages. Statutory damages
per claim are limited to $5.00 per subscriber, per month, or $250 in a six
month period. At present the Partnership remains unable to determine upon what
basis such damages would be calculated or what their amount might be.
Therefore, management is unable at this time to assess the impact, if any, of
the unasserted claim on the Partnership's results of operations, financial
position or cash flows.
OPTION AGREEMENT:
As described in Note 7, the Partnership, the Related Party and the BSS
licensee appealed the FCC's decision to terminate the license held by the BSS
license. The appellate court denied the appeal.
F-67
<PAGE>
PRIMESTAR PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
TEMPO OPTION AGREEMENT:
The Related Party has represented to management that it has entered into
agreements with a Canadian company to sell the satellites under construction,
and subject to both U.S. and Canadian regulatory approvals, to launch one or
both of the satellites into one or more orbital positions controlled directly
or indirectly by the Canadian company (see Notes 6 and 15). Despite such
representation, the Partnership's position with respect to its legal claims
regarding the ownership and control of the satellites has not changed. The
Parties are currently attempting to resolve their disagreement (See Note 15).
The Parties have not reached an agreement with respect to any such resolution
of their potential dispute, and there can be no assurance that any such
resolution can be reached, or can be reached on terms acceptable to the
Partnership. Management is unable at this time to assess the impact, if any, of
this matter on the Partnership's results of operations, financial position or
cash flows.
SATELLITE:
As described in Note 7, in 1996 the Partnership has entered into an agreement
with an affiliate of a Partner, pursuant to which the affiliate has agreed to
provide the Partnership with service on satellite transponders, subject to the
successful launch of the satellite. The satellite, which is currently scheduled
to launch on January 31, 1997 and to be operational within 60 days thereafter,
will replace the current satellite which is nearing the end of its useful life.
The agreement is for an initial term of four years from the date on which
service is made available, and has an annual rate of $46.8 million when the
satellite is fully utilized. The term is extendable for the remainder of the
useful life of the satellite at the option of the Partnership if exercised
prior to the later of December 31, 1996 and 45 days after written notice from
the affiliate to the Partnership that delivery of the satellite has occurred
under the contract.
F-68
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: October 29, 1996
TCI SATELLITE ENTERTAINMENT, INC.
By:
-----------------------
Kenneth G. Carroll
Senior Vice President and
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibit
- -------
No.
- ---
2.1 Form of Reorganization Agreement, dated as of ______________, 1996,
among Tele-Communications, Inc. ("TCI"), TCI Communications,
Inc.("TCIC"), Tempo Enterprises, Inc. ("Enterprises"), TCI Technology
Ventures, Inc. ("TCITV"), TCI Digital Satellite Entertainment, Inc.
("Digital"), TCI K-1, Inc. ("TCI K-1"), United Artists K-1
Investments, Inc. ("UA K-1"), TCISE Partner 1, Inc. ("TCISE 1"), TCISE
Partner 2, Inc. ("TCISE 2") and TCI Satellite Entertainment, Inc. (the
"Company").
2.2 Form of Trade Name and Service Mark License Agreement dated as of
_______________, 1996, between TCI and the Company.*
2.3 Form of Transition Services Agreement dated as of ________________,
1996, between TCI and the Company.
2.4 Fulfillment Agreement dated as of August 30, 1996, between TCIC
and the Company.*
2.5 Tax Sharing Agreement effective July 1, 1995, among TCIC and certain
other subsidiaries of TCI.
2.5.1 First Amendment to Tax Sharing Agreement dated as of October__, 1995,
among TCIC and certain other subsidiaries of TCI.
2.5.2 Form of Second Amendment to Tax Sharing Agreement dated as of
October__,1996, among TCIC and certain other subsidiaries of TCI.
2.6 Form of Credit Agreement dated as of ________________, 1996, between
TCIC and the Company.
2.7 Form of Share Purchase Agreement dated as of ________________, 1996,
between TCI and the Company.
3.1 Amended and Restated Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.
4.1 Specimen form of certificate representing shares of Series A Common
Stock of the Company.*
4.2 Specimen form of certificate representing shares of Series B Common
Stock of the Company.*
4.3 TPO-1-290 BSS Construction Agreement dated as of February 22, 1990,
between Tempo and Space Systems/Loral, Inc.*
- ---------------------------
* previously filed
<PAGE>
4.4 Satellite Purchase Agreement dated as of May 6, 1996, between Tempo
and Telesat Canada ("Telesat").
4.5 Operating Services Agreement dated as of May 6, 1996, between TCITV
and Telesat.
4.6 Limited Partnership Agreement dated February 8, 1990, among ATC
Satellite Inc., Comcast DBS, Inc., Continental Satellite Company,
Inc., Cox Satellite, Inc., G.E. Americom Services, Inc., New Vision
Satellite, TCI K-1, UA K-1, Viacom K-Band, Inc. and Warner Cable SSD,
Inc.*
4.6.1 Amendment to Limited Partnership Agreement dated September 1,
1993.*
4.6.2 Amendment to Limited Partnership Agreement dated December 15,
1993.*
4.6.3 Amendment to Limited Partnership Agreement dated October 18, 1996.
4.7 Tag Along Agreement dated as of February 8, 1990, among Cox
Enterprises, Inc., Comcast Corporation, Continental Cablevision, Inc.,
Newhouse Broadcasting Corporation, Tempo, TCI Development Corporation
and TCI.*
4.8 Option Agreement dated February 8, 1990, between Tempo and K Prime
Partners, L.P.*
4.9 Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR
Partners, L.P. relating to FSS.*
4.10 Letter Agreement dated July 30, 1993, between Tempo and PRIMESTAR
Partners, L.P. relating to BSS.*
4.11 Amended and Restated Reimbursement Agreement dated March 1, 1995,
between TCI UA 1, Inc., Chemical Bank and The Toronto Dominion Bank.*
10.1 Form of Indemnification Agreement dated as of ________________, 1996,
by and between the Company and TCI UA 1, Inc.
10.2 Form of Indemnification Agreement dated as of ________________, 1996,
by and between the Company and TCI Technology Ventures, Inc.*
10.3 Form of Indemnification Agreement dated as of _____________, 1996,
between the Company and TCIC.
10.4 TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan.
10.5 Form of Qualified Employee Stock Purchase Plan.*
10.6 Form of Idemnification Agreement dated ________________, 1996, by and
between TCI and Gary S. Howard.
10.7 Form of Option Agreement, dated as of November _____, 1996, by and
between the Company and Gary S. Howard.
10.8 Form of Option Agreement, dated as of November _____, 1996, by and
between the Company and Larry E. Romrell.
10.9 Form of Option Agreement, dated as of November _____, 1996, by and
between the Company and Brendan R. Clouston.
10.10 Form of Option Agreement, dated as of November _____, 1996, by and
between the Company and David P. Beddow.
- --------------------
* previously filed
<PAGE>
10.11 1996 Ancillary Agreement Among Partners dated as of October 18, 1996,
among PRIMESTAR Partners, L.P., the Participating Partners named
therein, GE American Services, Inc. and its affiliate GE American
Communications, Inc.
10.11.1 Annex A to the 1996 Ancillary Agreement Among Partners.
10.12 Equipment Sale Agreement, dated as of October 21, 1996, between ResNet
Communications, Inc. ("ResNet") and the Company.
10.13 Subordinated Convertible Term Loan Agreement, dated as of October 21,
1996, by and between ResNet, as Borrower, and the Company, as Lender.
10.14 Option Agreement, dated as of October 21, 1996, between ResNet and the
Company.
10.15 Standstill Agreement, dated as of October 21, 1996, by and between
LodgeNet Entertainment Corporation ("LodgeNet") and the Company.
10.16 Stockholders' Agreement, dated as of October 21, 1996, between
LodgeNet and the Company.
10.17 Subscription Agreement, dated as of October 21, 1996, between ResNet
and the Company.
21 List of subsidiaries of the Company.
- --------------------
* previously filed
<PAGE>
EXHIBIT 2.1
-----------
[FORM OF]
REORGANIZATION AGREEMENT
among
Tele-Communications, Inc.
TCI Communications, Inc.
Tempo Enterprises, Inc.
TCI Technology Ventures, Inc.
TCI Digital Satellite Entertainment, Inc.
TCI K-1, Inc.
United Artists K-1 Investments, Inc.
TCISE Partner 1, Inc.
TCISE Partner 2, Inc.
and
TCI Satellite Entertainment, Inc.
Dated as of __________, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I
THE MERGERS
<S> <C> <C>
Section 1.1 The Mergers............................................2
Section 1.2 Effective Time of The Mergers..........................2
Section 1.3 Effect of The Mergers..................................2
Section 1.4 Certificate of Incorporation and By-laws...............3
Section 1.5 Directors And Officers of Surviving Corporation........4
Section 1.6 Conversion of Securities...............................4
ARTICLE II
CONTRIBUTION TO CAPITAL OF THE COMPANY BY TCIC
Section 2.1 Contribution...........................................5
Section 2.2 IRS Classification.....................................5
ARTICLE III
SALES OF PARTNERSHIP INTERESTS
BY TCI K-1 TO SUB 1 AND BY UA K-1 TO SUB 2
Section 3.1 Sales of Partnership Interests.........................5
Section 3.2 Purchase Price.........................................5
Section 3.3 Assumption of Liabilities..............................6
ARTICLE IV
ISSUANCE OF PROMISSORY NOTE BY THE COMPANY TO TCIC....................6
ARTICLE V SPINOFF OF THE COMPANY TO TCI....................................6
ARTICLE VI
ASSUMPTION OF INDEBTEDNESS
Section 6.1 Assumption and Novation................................7
Section 6.2 Allocation of Consideration............................7
ARTICLE VII
ASSIGNMENT AND ASSUMPTION OF
OPERATING SERVICES AGREEMENT..........................................8
ARTICLE VIII
DISTRIBUTION OF THE COMPANY COMMON STOCK
TO THE TCI GROUP STOCKHOLDERS
Section 8.1 Amended and Restated Certificate of
Incorporation of the Company...........................8
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Section 8.2 Reclassification of Company Common Stock...............8
Section 8.3 The Distribution.......................................9
Section 8.4 Conditions to the Distribution.........................9
Section 8.5 Treatment of Outstanding Options and SARs.............10
ARTICLE IX
REPRESENTATIONS AND WARRANTIES
Section 9.1 Representations And Warrantiesof the Parties..........11
Section 9.2 Additional Representations and Warranties of TCIC.....12
Section 9.3 Additional Representatives and Warranties of the
Company, Sub 1 and Sub 2..............................13
ARTICLE X
COVENANTS
Section 10.1 Cross-Indemnities.....................................13
Section 10.2 Further Assurances....................................14
Section 10.3 Specific Performance..................................14
Section 10.4 Access to Information.................................15
Section 10.5 Confidentiality.......................................15
ARTICLE XI
CLOSING
Section 11.1 Closing...............................................16
Section 11.2 Conditions to Closing.................................16
Section 11.3 Deliveries at Closing.................................17
ARTICLE XII
TERMINATION
Section 12.1 Termination...........................................20
Section 12.2 Effect of Termination.................................20
ARTICLE XIII
MISCELLANEOUS
Section 13.1 No Third-Party Rights.................................21
Section 13.2 Notices...............................................21
Section 13.3 Entire Agreement......................................21
Section 13.4 Amendment, Modification or Waiver.....................22
Section 13.5 Binding Effect; Benefit; Successors And Assigns.......22
Section 13.6 Costs And Expenses....................................22
Section 13.7 Severability..........................................22
Section 13.8 Miscellaneous.........................................22
</TABLE>
ii
<PAGE>
EXHIBIT A -- Form of Subsidiary Notes
EXHIBIT B -- Form of Company Note
EXHIBIT C -- Form of Company Charter
EXHIBIT D -- Form of Company Stock Option Agreement
SCHEDULE 8.1(b) -- Certain Agreements
SCHEDULE 8.5(d) -- Company Stock Options
iii
<PAGE>
INDEX TO DEFINITIONS
The following terms used in this Agreement are defined in the sections
indicated:
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Add-on Company Option Section 8.5(b)(i)
Adjusted TCI Option Section 8.5(b)(ii)
Agents Section 10.5(a)
Agreement Preamble
Assumed Liabilities Section 3.3(b)
Assumption Amount Section 6.1
Certificates of Merger Section 1.2
Closing Section 11.1
Closing Date Section 11.1
Code Section 2.2
Colorado Act Section 1.1(a)
Company Preamble
Company Charter Section 8.1
Company Common Stock Section 8.3(a)
Company Note Article IV
Company Stock Options Section 8.5(d)
Delaware Act Section 1.1(a)
Digital Preamble
Digital Constituent Corporations Section 1.1(a)
Digital Merger Section 1.1(a)
Digital Satellite Assets Section 10.1(b)(i)(B)
Digital Satellite Business Recitals
Digital Stock Section 1.6(a)(ii)
Digital Surviving Corporation Section 1.1(a)
Disclosing Party Section 10.5(b)
Distribution Recitals
Distribution Date Section 8.3(b)
Effective Time of the Mergers Section 1.2
Enterprises Preamble
Enterprises Constituent Corporations Section 1.1(b)
Enterprises Merger Section 1.1(b)
Enterprises Surviving Corporation Section 1.1(b)
Grant Date Section 8.5(d)
Interests Section 3.1(b)
Losses Section 10.1(a)
Mergers Section 1.1(b)
Oklahoma Act Section 1.1(b)
Operating Services Agreement Article VII
Partnership Section 3.1(a)
Partnership Agreement Section 3.1(a)
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Party Section 10.4(a)
Proprietary Information Section 10.5(b)
receiving Party Section 10.5(b)
Reclassification Section 8.2
Record Date Section 8.3(b)
Series A Common Stock Section 8.2
Series A TCI Group Common Stock Recitals
Series B Common Stock Section 8.2
Series B TCI Group Common Stock Recitals
Sub 1 Preamble
Sub 1 Note Section 3.2
Sub 2 Preamble
Sub 2 Note Section 3.2
Subsidiary Notes Section 3.2
TCI Preamble
TCI Board Section 8.4(a)
TCIC Preamble
TCI Group Common Stock Recitals
TCI Group Stockholders Section 8.3(a)
TCI K-1 Preamble
TCI K-1 Assumed Liabilities Section 3.3(a)
TCI K-1 Interest Section 3.1(a)
TCI Options Section 8.5(a)
TCI Plan Committee Section 8.5(a)
TCI Plans Section 8.5(a)
TCI SARs Section 8.5(a)
TCITV Preamble
Telesat Article VII
Tempo Recitals
Tempo Shares Section 2.1
Tempo Stock Section 2.1
UA K-1 Preamble
UA K-1 Assumed Liabilities Section 3.3(b)
UA K-1 Interest Section 3.1(b)
</TABLE>
v
<PAGE>
REORGANIZATION AGREEMENT
Reorganization Agreement (this "Agreement"), dated as of ________ __,
1996, among Tele-Communications, Inc., a Delaware corporation ("TCI"), TCI
Communications, Inc., a Delaware corporation ("TCIC"), Tempo Enterprises, Inc.,
an Oklahoma corporation ("Enterprises"), TCI Technology Ventures, Inc., a
Delaware corporation ("TCITV"), TCI Digital Satellite Entertainment, Inc., a
Colorado corporation ("Digital"), TCI K-1, Inc., a Colorado corporation ("TCI
K-1"), United Artists K-1 Investments, Inc., a Colorado corporation ("UA K-1"),
TCISE Partner 1, Inc., a Colorado corporation ("Sub 1"), TCISE Partner 2, Inc.,
a Colorado corporation ("Sub 2") and TCI Satellite Entertainment, Inc., a
Delaware corporation (the "Company").
RECITALS
A. Each of the parties to this agreement other than TCI is a direct
or indirect subsidiary of TCI. The parties desire to effect the transactions set
forth in this Agreement in connection with a plan to reorganize and spin off
TCI's interests in the business of distributing multichannel programing services
directly to consumers in the United States via digital broadcast satellite,
including the rental and sale of customer premises equipment relating thereto
(the "Digital Satellite Business"), which plan was adopted by TCI's Board of
Directors on June 17, 1996. Upon the consummation of the transactions provided
for herein, subject to regulatory approval and certain other conditions, TCI
intends to distribute (the "Distribution") all the capital stock of the Company
to the holders of record of shares of Tele-Communications, Inc. Series A TCI
Group Common Stock, par value $1.00 per share (the "Series A TCI Group Common
Stock"), and Tele-Communications, Inc. Series B TCI Group Common Stock, par
value $1.00 per share (the "Series B TCI Group Common Stock" and together with
the Series A TCI Group Common Stock, the "TCI Group Common Stock").
B. TCIC and TCITV are subsidiaries of TCI.
C. Enterprises and Digital are direct wholly-owned subsidiaries of
TCIC.
D. Tempo Satellite, Inc., an Oklahoma corporation ("Tempo"), is a
direct wholly-owned subsidiary of Enterprises.
E. TCI K-1 and UA K-1 are indirect wholly-owned subsidiaries of
TCIC.
F. The Company is a direct wholly-owned subsidiary of Digital. Sub 1
and Sub 2 are direct wholly-owned subsidiaries of the Company. The Company, Sub
1 and Sub 2 were formed in connection with the Distribution.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises contained herein, the parties hereto agree as follows:
<PAGE>
ARTICLE I
THE MERGERS
Section 1.1 The Mergers.
(a) In accordance with and subject to the provisions of this
Agreement, the Business Corporation Act of the State of Colorado (the "Colorado
Act") and the General Corporation Law of the State of Delaware (the "Delaware
Act"), at the Effective Time of the Mergers, Digital shall be merged with and
into the Company and the separate existence of Digital shall cease, and the
Company shall continue as the surviving corporation (sometimes referred to
herein as the "Digital Surviving Corporation") under the laws of the State of
Delaware (the "Digital Merger"). The Company and Digital are sometimes referred
to collectively herein as "the Digital Constituent Corporations." The Digital
Merger is intended to be a "short form" merger pursuant to section 253 of the
Delaware Act and section 7-111-104 of the Colorado Act.
(b) In accordance with and subject to the provisions of this
Agreement, the General Corporation Act of the State of Oklahoma (the "Oklahoma
Act") and the Delaware Act, at the Effective Time of the Mergers, Enterprises
shall be merged with and into TCIC, and the separate existence of Enterprises
shall cease, and TCIC shall continue as the surviving corporation (sometimes
referred to herein as the "Enterprises Surviving Corporation") under the laws of
the State of Delaware (the "Enterprises Merger" and, together with the Digital
Merger, the "Mergers"). TCIC and Enterprises are sometimes referred to
collectively herein as the "Enterprises Constituent Corporations." The
Enterprises Merger is intended to be a "short form" merger pursuant to section
253 of the Delaware Act and section 1083 of the Oklahoma Act.
Section 1.2 Effective Time of The Mergers.
Subject to the provisions of this Agreement, as soon as
practicable on or after the Closing Date, the parties to the Mergers shall file
such certificates of merger, articles of merger or other appropriate documents
(in any case, the "Certificates of Merger") executed in accordance with the
relevant provisions of the Delaware Act and the Colorado Act or the Oklahoma
Act, as the case may be, as shall be necessary or desirable in connection with
the Mergers. Each Merger shall become effective at the time specified in the
applicable Certificate of Merger, which specified time shall be the same in each
Certificate of Merger (the time the Mergers become effective being the
"Effective Time of the Mergers").
Section 1.3 Effect of The Mergers.
(a) From and after the Effective Time of the Mergers, the
Digital Merger will have the effects set forth in section 259 of the Delaware
Act and, to the extent applicable, section 7-111-106 of the Colorado Act. If, at
any time after the Effective Time of the Mergers, the Digital Surviving
Corporation determines that any deeds, bills of sale, assignments, assurances or
any other
2
<PAGE>
actions or things are necessary or desirable to vest, perfect or confirm of
record or otherwise in the Digital Surviving Corporation its rights, title and
interests in, to or under any of the rights, properties or assets of either of
the Digital Constituent Corporations, or otherwise to carry out the intent and
purposes of the Digital Merger, the officers and directors of the Digital
Surviving Corporation shall be authorized to execute and deliver, in the name
and on behalf of each of the Digital Constituent Corporations, all such deeds,
bills of sale, assignments and assurances, and to take and do, in the name and
on behalf of each of the Digital Constituent Corporations, all such other
actions and things, as may be necessary or desirable to vest, perfect or confirm
any and all rights, title and interests in, to and under such rights, properties
or assets in the Digital Surviving Corporation or otherwise to carry out the
intent and purposes of the Digital Merger.
(b) From and after the Effective Time of the Mergers, the Enterprises
Merger will have the effects set forth in section 259 of the Delaware Act and,
to the extent applicable, sections 1088 and 1090 of the Oklahoma Act. If, at
any time after the Effective Time of the Mergers, the Enterprises Surviving
Corporation determines that any deeds, bills of sale, assignments, assurances or
any other actions or things are necessary or desirable to vest, perfect or
confirm of record or otherwise in the Enterprises Surviving Corporation its
rights, title and interests in, to or under any of the rights, properties or
assets of either of the Enterprises Constituent Corporations, or otherwise to
carry out the intent and purposes of the Enterprises Merger, the officers and
directors of the Enterprises Surviving Corporation shall be authorized to
execute and deliver, in the name and on behalf of each of the Enterprises
Constituent Corporations, all such deeds, bills of sale, assignments and
assurances, and to take and do, in the name and on behalf of each of the
Enterprises Constituent Corporations, all such other actions and things, as may
be necessary or desirable to vest, perfect or confirm any and all rights, title
and interests in, to and under such rights, properties or assets in the
Enterprises Surviving Corporation or otherwise to carry out the intent and
purposes of the Enterprises Merger.
Section 1.4 Certificate of Incorporation and By-laws.
(a) Digital Merger. At the Effective Time of the Mergers, the
--------------
certificate of incorporation of the Company, as in effect immediately prior to
such time, shall be the certificate of incorporation of the Digital Surviving
Corporation until thereafter altered, amended or repealed as provided therein or
in the Delaware Act. The by-laws of the Company, as in effect at the Effective
Time of the Mergers, shall be the by-laws of the Digital Surviving Corporation
until thereafter altered, amended or repealed as provided therein or in the
Delaware Act or in the certificate of incorporation of the Digital Surviving
Corporation.
(b) Enterprises Merger. At the Effective Time of the Mergers,
------------------
the certificate of incorporation of TCIC, as in effect immediately prior to such
time, shall be the certificate of incorporation of the Enterprises Surviving
Corporation until thereafter altered, amended or repealed as provided therein or
in the Delaware Act. The by-laws of TCIC, as in effect at the Effective Time of
the Mergers, shall be the by-laws of the Enterprises Surviving Corporation until
thereafter altered,
3
<PAGE>
amended or repealed as provided therein or in the Delaware Act or in the
certificate of incorporation of the Enterprises Surviving Corporation.
Section 1.5 Directors And Officers of Surviving Corporation.
(a) The directors of the Company and TCIC immediately prior to
the Effective Time of the Mergers shall be the directors of the Digital
Surviving Corporation and the Enterprises Surviving Corporation, respectively,
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be.
(b) The officers of the Company and TCIC immediately prior to
the Effective Time of the Mergers shall be the officers of the Digital Surviving
Corporation and the Enterprises Surviving Corporation, respectively, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
Section 1.6 Conversion of Securities.
(a) Digital Merger. At the Effective Time of the Mergers,
--------------
subject and pursuant to the terms of this Agreement and the Delaware Act, by
virtue of the Digital Merger and without any action on the part of the Digital
Constituent Corporations or any other person, (i) each issued and outstanding
share of capital stock of the Company as of immediately prior to the Effective
Time of the Mergers, all of which is owned beneficially and of record by
Digital, and each share of such capital stock of the Company that is then held
by the Company as treasury stock, if any, shall be canceled and retired without
consideration, (ii) each issued and outstanding share of the common stock, par
value $1.00 per share, of Digital as of immediately prior to the Effective Time
of the Mergers (the "Digital Stock"), shall be converted into one share of
common stock, par value $1.00 per share, of the Digital Surviving Corporation,
and (iii) any shares of Digital Stock then held by Digital as treasury stock
shall be canceled and retired without consideration.
(b) Enterprises Merger. At the Effective Time of the Mergers,
------------------
subject and pursuant to the terms of this Agreement and the Delaware Act, by
virtue of the Enterprises Merger and without any action on the part of the
Enterprises Constituent Corporations or any other person, (i) each issued and
outstanding share of capital stock of TCIC, and each share of capital stock of
TCIC then held by TCIC as treasury stock, if any, shall remain issued and
outstanding and shall not be affected in any way by the Enterprises Merger and
(ii) each share of capital stock of Enterprises then issued and outstanding or
held by Enterprises in its treasury shall be canceled and retired without
consideration.
4
<PAGE>
ARTICLE II
CONTRIBUTION TO CAPITAL OF THE COMPANY BY TCIC
Section 2.1 Contribution.
TCIC hereby agrees to grant, assign, transfer, deliver and convey
to the Company at the Closing, effective immediately following the Effective
Time of the Mergers, as a contribution to capital and without further
consideration, 1,000 shares (the "Tempo Shares") of the common stock, par value
$1.00 per share, of Tempo (the "Tempo Stock"), which shares constitute all the
issued and outstanding shares of capital stock of Tempo. The Company hereby
agrees to acquire, accept and receive all of TCIC's rights, title and interests
in and to the Tempo Shares .
Section 2.2 IRS Classification.
The conveyance contemplated by this Article II is being
undertaken by the parties pursuant to Section 368(a)(1)(D) of the Internal
Revenue Code of 1986, as amended (the "Code").
ARTICLE III
SALES OF PARTNERSHIP INTERESTS
BY TCI K-1 TO SUB 1 AND BY UA K-1 TO SUB 2
Section 3.1 Sales of Partnership Interests.
(a) TCI K-1 hereby agrees to sell, assign, transfer, deliver and
convey to Sub 1 at the Closing all rights, title and interests of TCI K-1 in and
to its general and limited partnership interests (the "TCI K-1 Interest") in
PRIMESTAR Partners, L.P. (the "Partnership"), including, without limitation, its
rights under the Limited Partnership Agreement of the Partnership dated as of
February 8, 1990, as amended (the "Partnership Agreement").
(b) UA K-1 hereby agrees to sell, assign, transfer, deliver and
convey to Sub 2 at the Closing all rights, title and interests of UA K-1 in and
to its general and limited partnership interests (the "UA K-1 Interest" and,
collectively with the TCI K-1 Interest, the "Interests") in the Partnership,
including, without limitation, its rights under the Partnership Agreement.
Section 3.2 Purchase Price.
In consideration for the respective Interests, at the Closing,
Sub 1 hereby agrees to deliver to TCI K-1 a promissory note, substantially in
the form of Exhibit A attached hereto (the "Sub 1 Note"), in the original
principal amount of $________, and Sub 2 hereby agrees to deliver to UA K-1 a
promissory note, substantially in the form of Exhibit A attached hereto (the
"Sub 2
5
<PAGE>
Note" and, together with the Sub 1 Note, the "Subsidiary Notes"), in the
original principal amount of $________.
Section 3.3 Assumption of Liabilities.
(a) In connection with the sale of the TCI K-1 Interest as
contemplated hereby, and in further consideration thereof, Sub 1 hereby agrees
to be bound by all applicable provisions of the Partnership Agreement and to
assume and to perform and discharge, or cause to be performed and discharged,
when due any and all obligations and liabilities of TCI K-1 that were incurred
by TCI K-1 as a partner of the Partnership, including without limitation all
liabilities of TCI K-1 under the Partnership Agreement, whether such liabilities
(hereinafter collectively referred to as the "TCI K-1 Assumed Liabilities") are
known or unknown, accrued or unaccrued, liquidated or unliquidated in amount,
fixed or contingent, due or to become due, existing or inchoate, and whether
arising on or before or after the date hereof.
(b) In connection with the sale of the UA K-1 Interest as
contemplated hereby, and in further consideration thereof, Sub 2 hereby agrees
to be bound by all applicable provisions of the Partnership Agreement and to
assume and to perform and discharge, or cause to be performed and discharged,
when due any and all obligations and liabilities of UA K-1 that were incurred by
UA K-1 as a partner of the Partnership, including without limitation all
liabilities of UA K-1 under the Partnership Agreement, whether such liabilities
(hereinafter referred to as the "UA K-1 Assumed Liabilities" and, collectively
with the TCI K-1 Assumed Liabilities, the "Assumed Liabilities") are known or
unknown, accrued or unaccrued, liquidated or unliquidated in amount, fixed or
contingent, due or to become due, existing or inchoate, and whether arising on
or before or after the date hereof.
ARTICLE IV
ISSUANCE OF PROMISSORY NOTE BY THE COMPANY TO TCIC
At the Closing, immediately following the consummation of the
transactions provided for in Articles I, II and III of this Agreement, the
Company shall deliver to TCIC a promissory note, substantially in the form
attached hereto as Exhibit B (the "Company Note"), in an amount equal to the
intercompany balance between the Company and TCIC and/or any of TCIC's other
consolidated subsidiaries as of the Closing Date, in satisfaction of such
intercompany balance.
ARTICLE V
SPINOFF OF THE COMPANY TO TCI
At the Closing, immediately following delivery of the Company
Note by the Company to TCIC pursuant to Article IV hereof, TCIC shall distribute
to TCI, as a tax-free spinoff, all the issued and outstanding capital stock of
the Company.
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ARTICLE VI
ASSUMPTION OF INDEBTEDNESS
Section 6.1 Assumption and Novation.
At the Closing, immediately following the consummation of the
transaction provided for in Article V of this Agreement, TCI shall assume
indebtedness of the Company and/or its subsidiaries in an amount equal to the
excess of (a) the aggregate principal amounts of the Company Note and the
Subsidiary Notes over (b) $250,000,000 (such excess, the "Assumption Amount").
Such assumption of indebtedness shall be effected as follows:
(a) At the Closing, TCI shall assume, by novation, a portion of
the indebtedness represented by the Subsidiary Notes and Company Note equal in
the aggregate to the Assumption Amount. Such assumption of indebtedness shall be
applied first against the Subsidiary Notes, and then against the Company Note,
to the extent that the Assumption Amount exceeds the aggregate principal amount
of the Subsidiary Notes.
(b) Upon the assumption of indebtedness and novation provided for
in paragraph (a) of this Article VI:
(i) the Company Note and the Subsidiary Notes shall be
canceled and retired;
(ii) TCI shall issue its promissory notes to TCIC, TCI K-1
and UA K-1 in the respective principal amounts of the indebtedness to such
entities assumed by TCI, which notes shall be in substantially the forms of
the Company Note and the Subsidiary Notes, as the case may be, or in such
other form or forms as TCI and the payees shall agree; and
(iii) the Company shall issue to TCIC a substitute promissory
note, substantially in the form of the Company Note so canceled and
retired, in the principal amount of $250,000,000.
Section 6.2 Allocation of Consideration.
The consideration received by the Company as a result of the assumption of
indebtedness provided for in Section 6.1 shall be allocated as follows:
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(a) $100,000,000 of such indebtedness shall be assumed by TCI
as a capital contribution to the Company by TCI; and
(b) the remainder of such indebtedness shall be assumed by TCI
as consideration for the assumption by the Company at the Closing of TCI's
obligations under the Company Stock Options, as provided in Section 8.5 (d) of
this Agreement.
ARTICLE VII
ASSIGNMENT AND ASSUMPTION OF
OPERATING SERVICES AGREEMENT
TCITV hereby agrees to assign and delegate in full to the Company (or, at
the election of the Company, a subsidiary of the Company), and the Company
hereby agrees to assume (or cause such subsidiary to assume), at the Closing,
all rights and obligations of TCITV under the Operating Services Agreement dated
as of May 6, 1996 (the "Operating Services Agreement"), between TCITV and
Telesat Canada, a Canadian corporation ("Telesat").
ARTICLE VIII
DISTRIBUTION OF THE COMPANY COMMON STOCK
TO THE TCI GROUP STOCKHOLDERS
Section 8.1 Amended and Restated Certificate of Incorporation of the Company.
Following the Closing and prior to the Distribution (i) the Company will
cause the Certificate of Incorporation of the Company to be amended and
restated, substantially in the form attached hereto as Exhibit C (the "Company
Charter"), (ii) TCI, as the sole stockholder of the Company, will approve the
Company Charter and (iii) the Company will cause the Company Charter to be filed
in the State of Delaware, in accordance with the Delaware Act.
Section 8.2 Reclassification of Company Common Stock.
Immediately following the amendment and restatement of the Certificate of
Incorporation of the Company as provided in Section 8.1, the Company will
reclassify (the "Reclassification") all of the issued and outstanding common
stock of the Company, which at such time will consist
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of 1,000 shares of common stock owned by TCI, into that number of shares of
Series A Common Stock, par value $1.00 per share, of the Company (the "Series A
Common Stock") and that number of shares of Series B Common Stock, par value
$1.00 per share, of the Company (the "Series B Common Stock") as shall in the
aggregate be sufficient to effect the Distribution in accordance with Section
8.3 hereof.
Section 8.3 The Distribution.
(a) On the Distribution Date, after giving effect to the Reclassification
as provided in Section 8.2, and subject to the conditions to the Distribution
set forth in Section 8.4, TCI shall distribute to the holders of record of TCI
Group Common Stock at the close of business on the Record Date, other than TCI
or any subsidiary of TCI (such holders, the "TCI Group Stockholders"), as a
dividend, all the issued and outstanding shares of Series A Common Stock and
Series B Common Stock (collectively, the "Company Common Stock"), on the basis
of one share of Series A Common Stock for each ten shares of Series A TCI Group
Common Stock held of record on the Record Date and one share of Series B Common
Stock for each ten shares of Series B TCI Group Common Stock held of record on
the Record Date, rounded for each TCI Group Stockholder as provided in Section
8.3(c).
(b) The TCI Board shall have the authority (i) to declare or refrain from
declaring the Distribution, (ii) to establish or change the record date for the
Distribution (the "Record Date"), (iii) to establish or change the date on which
the Distribution will be effective (the "Distribution Date") and (iv) to
establish or change the procedures for effecting the Distribution, subject to
this Agreement and the Delaware Act.
(c) Anything contained herein to the contrary notwithstanding, TCI will
not issue fractional shares of Company Common Stock in connection with the
Distribution. Fractions of one-half or greater of a share will be rounded up
and fractions of less than one-half of a share will be rounded down to the
nearest whole number of shares of Series A Common Stock or Series B Common
Stock, as applicable, on a holder-by-holder basis.
Section 8.4 Conditions to the Distribution.
It shall be a condition to the effectiveness of the Distribution that, (a)
on or before the Record Date, the Board of Directors of TCI (the "TCI Board")
shall have taken all necessary corporate action to establish the Record Date and
the Distribution Date and to declare the Distribution in accordance with the
certificate of incorporation and by-laws of TCI and the Delaware Act, (b) prior
to the Distribution, Baker & Botts, L.L.P., counsel for TCI, shall have rendered
an opinion to the effect that the Distribution should qualify as a tax-free
transaction to the TCI Group Stockholders under Section 355 of the Code, and (c)
prior to the Distribution, the registration statement of the Company on Form 10
with respect to the registration under the Securities Exchange Act of 1934 of
the Series A Common Stock and the Series B Common Stock shall have become
effective, and such effectiveness shall not on the Distribution Date be stayed
or suspended.
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Section 8.5 Treatment of Outstanding Options and SARs.
(a) Certain directors, officers and employees of TCI and its subsidiaries
(including the Company) have been granted options to purchase shares of Series A
TCI Group Common Stock ("TCI Options") and stock appreciation rights with
respect to shares of Series A TCI Group Common Stock ("TCI SARs"). The TCI
Options and TCI SARs have been granted pursuant to various stock plans of TCI
(the "TCI Plans"). The TCI Plans give the committee of the TCI Board that
administers the TCI Plans (the "TCI Plan Committee") the authority to make
equitable adjustments to outstanding TCI Options and TCI SARs in the event of
certain transactions, of which the Distribution is one.
(b) Subject to the approval of the TCI Plan Committee and the TCI Board,
immediately prior to the Distribution, each TCI Option shall be divided into two
separately exercisable options: (i) an option to purchase Series A Common Stock
(an "Add-on Company Option"), exercisable for the number of shares of Series A
Common Stock that would have been issued in the Distribution in respect of the
shares of Series A TCI Group Common Stock subject to the applicable TCI Option,
if such TCI Option had been exercised in full immediately prior to the Record
Date, and containing substantially equivalent terms as the existing TCI Option,
and (ii) an option to purchase Series A TCI Group Common Stock (an "Adjusted TCI
Option"), exercisable for the same number of shares of Series A TCI Group Common
Stock as the corresponding TCI Option had been. The per share exercise price of
such TCI Option shall be allocated between the Add-on Company Option and the
Adjusted TCI Option, and all other terms of such TCI Option shall remain the
same in all material respects. Similar adjustments shall be made to the
outstanding TCI SARs, resulting in the holders thereof holding Adjusted TCI SARs
and Add-on Company SARs instead of TCI SARs, effective immediately prior to the
Distribution. The foregoing adjustments shall be made pursuant to the anti-
dilution provisions of the TCI Plans pursuant to which the respective TCI
Options and TCI SARs were granted.
(c) As a result of the foregoing, certain persons who remain TCI employees
or non-employee directors after the Distribution and certain persons who were
TCI employees prior to the Distribution but become Company employees after the
Distribution will hold both Adjusted TCI Options and separate Add-on Company
Options and/or will hold both Adjusted TCI SARs and separate Add-on Company
SARs. The obligations with respect to the Adjusted TCI Options, Add-on Company
Options, Adjusted TCI SARs and Add-on Company SARs held by TCI employees and
non-employee directors following the Distribution shall be obligations solely of
TCI. The obligations with respect to the Adjusted TCI Options, Add-on Company
Options, Adjusted TCI SARs and Add-on Company SARs held by persons who are
Company employees following the Distribution and are no longer TCI employees
shall be obligations solely of the Company. Prior to the Distribution, TCI and
the Company shall enter into an agreement to sell to each other from time to
time at the then current market price shares of Series A TCI Group Common Stock
and Series A Common Stock, respectively, as necessary to satisfy their
respective obligations under such securities.
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(d) In June 1996, the TCI Board and the Compensation Committee of the TCI
Board authorized and approved the grant to each of the persons set forth on
Schedule 8.5(d) attached hereto, effective as of the date of the Closing, (the
"Grant Date"), of an option to purchase that number of shares of Series A Common
Stock as shall represent, on the Grant Date after, giving effect to the
Distribution, that percentage of the total outstanding equity of the Company as
is set forth opposite the name of such person on such Schedule 8.5(d), at an
aggregate exercise price equal to that same percentage of TCI's total investment
in the Company as of the Grant Date (other than any portion of such investment
represented by a promissory note on the Grant Date) (such options collectively,
the "Company Stock Options"). In consideration of the agreement of TCI to make
the capital contribution to the Company provided for in Section 6.2(b) hereof,
the Company hereby agrees to assume the obligations of TCI under the Company
Stock Options. In that connection, on or before the Distribution Date, the
Company shall issue to each of the persons set forth in Schedule 8.5(d) a stock
option agreement substantially in the form of Exhibit D attached hereto, dated
as of the Grant Date and otherwise having the terms and conditions set forth in
Schedule 8.5(d). During the term of the Company Stock Options TCI shall notify
the Company promptly upon any termination of the employment with TCI and its
subsidiaries of any of the persons set forth on Schedule 8.5(d), and shall
promptly provide the Company with all other information as the Company shall
reasonably request to assist the Company in administering the Company Stock
Options in accordance with their terms.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES
Section 9.1 Representations And Warranties of the Parties.
Each of the parties hereto, severally as to itself and not jointly,
hereby represents and warrants to each of the other parties as follows:
(a) Organization and Qualification. Such party is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the state of
its incorporation, has all requisite corporate power and authority to own, lease
or operate its properties and to conduct the business heretofore conducted by
it, and is duly qualified and in good standing to do business in each
jurisdiction in which the properties owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary,
except in such jurisdictions where the failure to be so qualified and in good
standing would not have a material adverse effect on its business, financial
condition or results of operations.
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(b) Authorization and Validity of Agreement. Such party has all
---------------------------------------
requisite corporate power and authority to execute, deliver and perform this
Agreement. The execution, delivery and performance by such party of this
Agreement and the consummation by it of the transactions contemplated hereby
have been duly and validly authorized by the Board of Directors of such party
and, to the extent required by law, its stockholders, and no other corporate
action on its part is necessary to authorize the execution and delivery by such
party of this Agreement and the consummation by it of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by such
party, and is a valid and binding obligation of such party, enforceable in
accordance with its terms (except as enforceability may be limited by laws
affecting creditors' rights generally, or by principles governing the
availability of equitable remedies).
(c) No Approvals or Notices Required; No Conflict with Instruments.
--------------------------------------------------------------
The execution, delivery and performance by such party of this Agreement and the
consummation of the transactions contemplated hereby do not and will not
conflict with or result in a breach or violation of any of the terms or
provisions of, constitute a default under, or result in the creation of any
lien, charge or encumbrance upon any of its assets pursuant to the terms of, the
charter or bylaws of such party, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which it is a party or by which it
or any of its assets are bound, or any law, rule, regulation, judgment, order or
decree of any government, governmental instrumentality or court having
jurisdiction over it or its properties.
Section 9.2 Additional Representations and Warranties of TCIC.
TCIC hereby represents and warrants to the Company, Sub 1 and Sub 2 as
follows:
(a) TCI K-1 is the sole record and beneficial owner of the TCI K-1
Interest and, upon the transfer thereof to Sub 1, Sub 1 will acquire all rights,
title and interests of TCI K-1 in and to the TCI K-1 Interest, free and clear of
any liens, claims and encumbrances.
(b) UA K-1 is the sole record and beneficial owner of the UA K-1
Interest and, upon the transfer thereof to Sub 2, Sub 2 will acquire all rights,
title and interests of UA K-1 in and to the UA K-1 Interest, free and clear of
any liens, claims and encumbrances.
(c) The authorized capital stock of Tempo consists of 50,000 shares of
Tempo Stock, of which 1,000 shares have been duly issued and are outstanding.
The Tempo Shares have been duly authorized and validly issued, are fully paid,
nonassessable and free from preemptive rights, and constitute all of the issued
and outstanding shares of Tempo capital stock. As of the date of this
Agreement, the Tempo Shares are owned beneficially and of record by Enterprises,
free and clear of any and all liens, claims and encumbrances. Upon the
consummation of the Enterprises Merger and the contribution of the Tempo Shares
to the Company in accordance with Section 2.1, the Company will acquire from
TCIC good and marketable title to, and sole record and beneficial ownership of,
the Tempo Shares, free and clear of all liens, claims and encumbrances.
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(d) As of immediately prior to the Effective Time of the Mergers: (i)
all the issued and outstanding shares of capital stock of Enterprises, and all
the issued and outstanding shares of capital stock of Digital, are owned,
beneficially and of record, by TCIC; and (ii) all the issued and outstanding
shares of capital stock of the Company are owned, beneficially and of record, by
Digital.
Section 9.3 Additional Representations and Warranties of the Company, Sub 1
and Sub 2.
Each of the Company, Sub 1 and Sub 2 hereby represents and warrants to
each of the other parties that it has been given full access to and ample
opportunity to review and investigate all financial and other information in
connection with the transactions contemplated hereby as it has deemed necessary
to make an informed investment decision and has availed itself of such access
and opportunity to the full extent that it desired. In determining to enter
into this Agreement and consummate the transactions contemplated hereby, it has
not relied upon any representation, warranty, promise or agreement other than
those expressly contained herein, and no other representation, warranty, promise
or agreement has been made or shall be implied.
ARTICLE X
COVENANTS
Section 10.1 Cross-Indemnities.
(a) Each of the parties hereby covenants and agrees to indemnify and
hold harmless each of the other parties hereto and their respective
subsidiaries, officers and directors, from and against any and all losses,
liabilities, claims, damages, costs and expenses (including attorneys' fees and
disbursements and other reasonable professional fees and disbursements, whether
or not litigation is instituted) (collectively, "Losses") based upon, arising
out of or resulting from any breach of any representation, warranty or covenant
of such party contained herein.
(b) In addition to the indemnification provided for in Section
10.1(a), and except as otherwise expressly provided herein or in any of the
agreements set forth on Schedule 10.1(b) hereto:
(i) the Company and its subsidiaries hereby covenant and agree to
indemnify and hold harmless TCI and its subsidiaries and their respective
officers, directors, employees and agents, from and against (A) the Assumed
Liabilities, (B) any and all other Losses arising out of or resulting from the
operation by the Company, its subsidiaries, or any of their respective
predecessors of the Digital Satellite Business or the ownership by the Company,
its subsidiaries, or any of their respective predecessors of any assets used
primarily therein (collectively the "Digital Satellite Assets"), whether before
or after the
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Distribution and (C) any and all Losses arising out of or resulting from the
business, affairs, assets or liabilities of the Company and its subsidiaries
following the Distribution; and
(ii) TCI and its subsidiaries hereby covenant and agree to
indemnify and hold harmless the Company and its subsidiaries and their
respective officers, directors, employees and agents, from and against (A) any
and all Losses arising out of or resulting from (1) the operation by TCI, its
subsidiaries or any of their respective predecessors of any business other than
the Digital Satellite Business, (2) the ownership by TCI, its subsidiaries or
any of their respective predecessors of any assets other than the Digital
Satellite Assets, or (3) any other activity of TCI, its subsidiaries or any of
their respective predecessors, or any other reason or thing, not related to the
operation of the Digital Satellite Business or the ownership of any Digital
Satellite Assets, in any such case whether before or after the Distribution and
(B) any and all other Losses arising out of or resulting from the business,
affairs, assets or liabilities of TCI and its subsidiaries following the
Distribution.
(c) Any party seeking indemnification hereunder will give prompt
notice to the other party of any claim as to which indemnification is sought,
and will give the indemnifying party the right to control, at its own expense,
the conduct of any such claim, and any litigation arising out of such claim. An
indemnifying party shall not be liable for any settlement of any action or claim
effected without its consent, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, the party seeking indemnification hereunder shall
have the right, at its own expense, to participate in (but not control) the
defense of any third-party claim giving rise to a claim of indemnification
hereunder, and shall have the right to control (with counsel of its own choice
and at the expense of the indemnifying party) the defense of any such third
party claim if such third party claim shall seek any material non-monetary
damages or criminal penalties, or if the indemnifying party shall also be a
party or potential party to such claim (or another claim based on substantially
similar facts) and the party seeking indemnification shall have received an
opinion of counsel stating that the party seeking indemnification has
substantive defenses to such claim that are different from and potentially
inconsistent with those available to the indemnifying party.
Section 10.2 Further Assurances.
Each of the parties hereto covenants and agrees to make, execute,
acknowledge and deliver such instruments, agreements, consents, assurances and
documents, and take all such actions, as any other party may reasonably request
and as may reasonably be required in order to effectuate the purposes and
intents of this Agreement and to carry out the terms hereof, including, without
limitation, to vest in the Company the record and beneficial ownership of all of
the capital stock of Tempo and to vest in Sub 1 and Sub 2 respectively the
record and beneficial ownership of all rights, title and interests in and to the
TCI K-1 Interest and the UA K-1 Interest (including, without limitation, the
admission of Sub 1 and Sub 2 as limited and general partners in the Partnership,
in accordance with Section 10.04 of the Partnership Agreement).
Section 10.3 Specific Performance.
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Each of the parties hereto hereby acknowledges that the benefits to
the other parties of the performance by such party of its obligations to be
performed under this Agreement at and after the Closing are unique, that the
other parties hereto are willing to enter into this Agreement only upon
performance by such party of such obligations and that monetary damages may not
afford adequate remedy for failure to perform any of such obligations.
Accordingly, each of the parties hereto hereby consents to specific performance
of its obligations hereunder to be performed at or after the Closing and waives
any requirement for securing or posting of any bond in connection with the
obtaining by the other party or parties of any injunctive or other equitable
relief to enforce its or their rights hereunder.
Section 10.4 Access to Information.
(a) Each of (x) the Company and its subsidiaries and (y) TCI and its
subsidiaries (each, a "Party") shall provide to the other Party, at any time
before or after the Closing Date, upon written request and on a reasonable
schedule to be agreed by the Parties, any information in the possession or under
the control of a Party that the requesting Party reasonably needs (i) to comply
with reporting, filing or other requirements imposed on the requesting Party by
a federal, state or local judicial, regulatory, administrative or taxing
authority having jurisdiction over the requesting Party or (ii) to enable the
requesting Party to implement the transactions contemplated hereby, including
but not limited to performing its obligations under this Agreement.
(b) Any information owned by a Party that is provided to the other
Party pursuant to Section 10.4(a) shall remain the property of the providing
Party. Nothing contained in this Agreement shall be construed as granting or
conferring rights of license or otherwise in any such information.
(c) The Party requesting any information under this Section 10.4 shall
reimburse the other Party for the reasonable costs, if any, of creating,
gathering and copying such information, to the extent that such costs are
incurred for the benefit of the requesting Party. No Party shall have any
liability to the other Party in the event that any information exchanged or
provided pursuant to this Agreement that is an estimate or forecast, or is based
on an estimate or forecast, is found to be inaccurate, absent willful misconduct
by the Party providing such information.
Section 10.5 Confidentiality.
(a) Each of the Parties shall keep confidential for five years
following the Closing Date (or for five years following disclosure, whichever is
longer), and shall use reasonable efforts to cause its officers, directors,
employees, affiliates and agents (collectively, "Agents") to keep confidential
during such five year period, all Proprietary Information (as defined below) of
the other Party, in each case to the extent permitted by law.
(b) "Proprietary Information" means any proprietary ideas, plans and
information, including information of a technological or business nature, of a
Party (in this context, the
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"disclosing Party") (including all trade secrets, technology, intellectual
property, data, summaries, reports, or mailing lists, in whatever form or media
whatsoever, including oral communications, and however produced or reproduced),
that is marked proprietary or confidential, or that bears a marking of like
import, or that the disclosing Party states is to be considered proprietary or
confidential, or that a reasonable and prudent person would consider proprietary
or confidential under the circumstances of its disclosure. In addition, all
information of the types referred to in the immediately preceding sentence that
is used by the Company and its subsidiaries on or prior to the Closing Date and
that is maintained by TCI or the Company or any of their respective subsidiaries
as proprietary or confidential, or that a reasonable and prudent person would
consider proprietary or confidential under the circumstances, shall constitute
Proprietary Information of the Company for all purposes of this Section 10.5.
Notwithstanding the foregoing, information of a disclosing Party will not
constitute Proprietary Information (and the other Party (in this context, the
"receiving Party") shall have no obligation with respect thereto), to the extent
such information: (i) is approved for release by prior written authorization of
the disclosing Party; (ii) is disclosed in order to comply with a judicial order
issued by a court of competent jurisdiction, or to comply with government laws
or regulations, in which event the receiving Party shall give prior written
notice to the disclosing Party of such disclosure as soon as practicable and
shall cooperate with the disclosing Party in using commercially reasonable
efforts to obtain an appropriate protective order or equivalent, and provided
that the information shall continue to be Proprietary Information to the extent
it is covered by such protective order or equivalent; (iii) is disclosed to the
receiving Party or the receiving Party's Agents on a non-confidential basis by a
person other than the disclosing Party or its Agents that, to the receiving
Party's knowledge, is not restricted from disclosing such information to the
receiving Party by any contractual, fiduciary or other legal obligation; or (iv)
is independently developed after the Closing Date by the receiving Party or its
Agents.
ARTICLE XI
CLOSING
Section 11.1 Closing.
Unless this Agreement shall have been terminated and the transactions
contemplated by this Agreement abandoned pursuant to the provisions of Article
XII hereto, and subject to the satisfaction of all conditions set forth in
Section 11.2 (or waiver of such conditions to the extent such conditions may be
waived), the closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of TCI, at 5619 DTC Parkway,
Englewood, Colorado 80111, at a mutually acceptable time and date (the "Closing
Date").
Section 11.2 Conditions to Closing.
(a) The obligations of the parties hereto to complete the
transactions provided for herein are conditioned upon the following:
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(i) the receipt and continued validity of all third party
consents or waivers required to be obtained in connection with the
transactions contemplated by this Agreement; and
(ii) the receipt and continued validity of all consents,
approvals, orders, licenses or permits required to be received from the FCC
and the regulations of the FCC relating thereto in connection with the
transfer of control of or of an ownership interest in any of the businesses
of the parties hereto in which the Company (or any of its subsidiaries)
would have a direct or indirect interest upon consummation of the
transactions provided for herein;
[The parties hereto acknowledge that all consents, waivers, orders and approvals
referred to above have been obtained as of the date hereof.]
(b) The performance by each party hereto of its obligations
hereunder is further conditioned upon:
(i) the performance by each other party of its covenants and
agreements contained herein to the extent such are required to be performed
at or prior to the Closing; and
(ii) the representations and warranties of the other parties
herein being true and complete in all material respects as of the Closing
Date with the same force and effect as if made at and as of the Closing
Date.
Section 11.3 Deliveries at Closing.
(a) TCI. At the Closing, TCI shall deliver to
---
the appropriate party or parties:
(i) promissory notes to TCIC,TCI K-1 and UA K-1, pursuant to
Article VI, paragraph (b)(ii), hereof; and
(ii) certified copies of resolutions of its Board of Directors
authorizing the execution, delivery and performance by TCI of this
Agreement, which resolutions shall be in full force and effect at and as of
the Closing .
(b) TCIC. At the Closing, TCIC shall deliver to the appropriate party
----
or parties:
(i) executed certificates of ownership and merger in respect of
the Enterprises Merger pursuant to section 253(a) of the Delaware Act and
section 1083-A of the Oklahoma Act;
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(ii) stock certificates evidencing the Tempo Shares, duly
endorsed in blank or accompanied by stock powers duly executed in blank,
all in proper form for transfer to the Company; and
(iii) certified copies of resolutions of its Board of Directors
authorizing the execution, delivery and performance by TCIC of this
Agreement, and the consummation of the Enterprises Merger as provided
herein, which resolutions shall be in full force and effect at and as of
the Closing.
(c) The Company. At the Closing, the Company shall deliver to the
-----------
appropriate party or parties:
(i) executed articles of merger in respect of
the Digital Merger pursuant to section 7-111-105(1) of the Colorado Act;
(ii) the Company Note and a substitute promissory note pursuant
to Article VI, paragraph (b)(iii), hereof;
(iii) such instruments evidencing the assumption by the Company
(or Tempo, as applicable) of all obligations of TCITV under the Operating
Services Agreement, or such other documents, as in any case shall
reasonably be requested by Telesat or by any other party hereto, in order
to effect the assignment and assumption of the Operating Services Agreement
as contemplated by Article VII hereof; and
(iv) certified copies of resolutions of its Board of Directors
authorizing the execution, delivery and performance by the Company of this
Agreement, and the consummation of the Digital Merger as provided herein,
which resolutions shall be in full force and effect at and as of the
Closing.
(d) Enterprises. At the Closing, Enterprises shall deliver to each
-----------
other party certified copies of resolutions of its Board of Directors
authorizing execution, delivery and performance by Enterprises of this
Agreement, and the consummation of the Enterprises Merger as provided herein,
which resolutions shall be in full force and effect at and as of the Closing.
(e) Digital. At the Closing, Digital shall deliver to the
-------
appropriate party or parties:
(i) an executed certificate of ownership and merger in respect
of the Digital Merger pursuant to section 253(a) of the Delaware Act; and
(ii) certified copies of (A) resolutions of the Board of
Directors of Digital, authorizing the execution, delivery and performance
by Digital of this Agreement and the consummation of the Digital Merger as
provided herein, and (B) resolutions of TCIC, as sole
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stockholder of Digital, approving the Digital Merger pursuant to section
7-111-104(3) of the Colorado Act, which resolutions shall be in full
force and effect at and as of the Closing.
(f) TCI K-1. At the Closing, TCI K-1 shalldeliver to the appropriate
-------
party or parties:
(i) such bills of sale, assignments and other documents and
instruments of transfer as shall be necessary or desirable under the
Partnership Agreement or otherwise or as shall reasonably be requested by
any other party hereto in order to effectively vest in Sub 1 all rights,
title and interests of TCI K-1 to the TCI K-1 Interest; and
(ii) certified copies of resolutions of the Board of Directors of
TCI K-1 authorizing the execution, delivery and performance by TCI K-1 of
this Agreement, which resolutions shall be in full force and effect at and
as of the Closing.
(g) UA K-1. At the Closing, UA K-1 shall deliver to the appropriate
------
party or parties:
(i) such bills of sale, assignments and other documents and
instruments of transfer as shall be necessary or desirable under the
Partnership Agreement or otherwise or as shall reasonably be requested by
any other party hereto in order to effectively vest in Sub 2 all rights,
title and interests of UA K-1 to the UA K-1 Interest; and
(ii) certified copies of resolutions of the Board of Directors of
UA K-1 authorizing the execution, delivery and performance by UA K-1 of
this Agreement, which resolutions shall be in full force and effect at and
as of the Closing.
(h) Sub 1. At the Closing, Sub 1 shall deliver to the appropriate
-----
party or parties:
(i) the Sub 1 Note;
(ii) such instruments evidencing Sub 1's assumption of the TCI
K-1 Assumed Liabilities as shall reasonably be requested by any other party
hereto; and
(iii) certified copies of resolutions of the Board of Directors
of Sub 1 authorizing the execution, delivery and performance by Sub 1 of
this Agreement, which resolutions shall be in full force and effect at and
as of the Closing.
(i) Sub 2. At the Closing, Sub 2 shall deliver to the appropriate
-----
party or parties:
(i) the Sub 2 Note;
19
<PAGE>
(ii) such instruments evidencing Sub 2's assumption of the UA K-1
Assumed Liabilities as shall reasonably be requested by any other party
hereto; and
(iii) certified copies of resolutions of the Board of Directors
of Sub 2 authorizing the execution, delivery and performance by Sub 2 of
this Agreement, which resolutions shall be in full force and effect at and
as of the Closing.
(j) TCITV. At the Closing, TCITV shall deliver to the appropriate
-----
party or parties:
(i) such assignments and other documents and instruments of
transfer as shall be necessary or desirable under the Operating Services
Agreement and related agreements or otherwise or as shall reasonably be
requested by Telesat or by any other party hereto in order to effectively
vest in the Company (or Tempo, as applicable) all rights of TCITV under the
Operating Services Agreement and any related agreements between TCITV and
Telesat; and
(ii) certified copies of resolutions of the Board of Directors of
TCITV authorizing the execution, delivery and performance by TCITV of this
Agreement, which resolutions shall be in full force and effect at and as of
the Closing.
ARTICLE XII
TERMINATION
Section 12.1 Termination.
This Agreement may be terminated and the transactions contemplated by
this Agreement may be abandoned at any time prior to the Closing Date:
(i) by TCI for any reason; or
(ii) by any other party hereto if such party shall have
discovered any material error, misstatement or omission in any of the
representations or warranties of any other party hereto, any other party
shall have otherwise breached in any material respect any such
representation or warranty, any such representation or warranty shall not
be true and complete in all material respects at and as of the Closing Date
with the same effect as if made at and as of such time, or any other party
hereto shall fail to comply in any material respect with any of the terms,
covenants, conditions or agreements contained in this Agreement to be
complied with or performed by any such party at or prior to the Closing
Date.
20
<PAGE>
Section 12.2 Effect of Termination.
In the event of termination of this Agreement as provided by Section
12.1, this Agreement shall forthwith become void and the parties hereto shall
have no obligation or liability to each other with respect to the transactions
contemplated hereby. Upon any such termination, upon the request of TCI, the
parties shall cause the boards of directors of one or both of the Digital
Constituent Corporations and of one or both of the Enterprises Constituent
Corporations to take such actions as may be required to terminate their
respective agreements of merger contained herein.
ARTICLE XIII
MISCELLANEOUS
Section 13.1 No Third-Party Rights.
Nothing expressed or referred to in this Agreement is intended or
shall be construed to give any person or entity other than the parties hereto
any legal or equitable right, remedy or claim under or with respect to this
Agreement, or any provision hereof, it being the intention of the parties hereto
that this Agreement and all of its provisions and conditions are for the sole
and exclusive benefit of the parties to this Agreement and for the benefit of no
other person or entity.
Section 13.2 Notices.
All notices and communications hereunder shall be in writing and shall
be deemed to have been duly given if delivered personally or mailed, certified
or registered mail with postage prepaid, or sent by telegram or confirmed telex
or facsimile, addressed as follows:
if to TCI, TCIC, Tele-Communications, Inc.
TCITV, TCI K-1, 5619 DTC Parkway
UA K-1, Englewood, Colorado 80111
or Enterprises: Facsimile (303) 488-3245
Attention: Stephen M. Brett, Esq., Executive Vice
President, General Counsel and Secretary
if to Digital, TCI Satellite Entertainment, Inc.
the Company, 8085 South Chester, Suite 300
Sub 1 or Sub 2: Englewood, Colorado 80112
Facsimile (303) 712-4977
Attention: Gary S. Howard, President
or to such other address (or to the attention of such other person) as the
parties may hereafter designate in writing. All such notices and communications
shall be deemed to have been received
21
<PAGE>
on the date of delivery or the third business day after the mailing thereof,
except that any notice of a change of address shall be effective only upon
actual receipt thereof.
Section 13.3 Entire Agreement.
This Agreement (including the Exhibits attached hereto) constitutes
the entire agreement among the parties hereto and supersedes all prior
agreements and understandings, oral and written, among the parties hereto with
respect to the subject matter hereof.
Section 13.4 Amendment, Modification or Waiver.
Neither this Agreement nor any term hereof may be changed, waived,
discharged or terminated other than by agreement in writing signed by the
parties hereto. No waiver of any term, provision or condition of this
Agreement, whether by conduct or otherwise, in any one or more instance shall be
deemed or construed as a further or continuing waiver of any such term,
provision or condition of this Agreement or any other term, provision or
condition of this Agreement; but any party hereto may waive its rights in any
particular instance by written instrument of waiver.
Section 13.5 Binding Effect; Benefit; Successors And Assigns.
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and assigns, provided that this
--------
Agreement may not be assigned by any of the parties hereto without the prior
written consent of the other parties hereto.
Section 13.6 Costs And Expenses.
All costs and expenses incurred in connection with the authorization,
preparation and consummation of this Agreement and the transactions contemplated
hereby shall be borne one-half by the Company and one-half by TCI, unless the
parties shall otherwise agree.
Section 13.7 Severability.
It is the intention of the parties hereto that the provisions of this
Agreement shall be enforced to the fullest extent permissible under all
applicable laws and public policies, but that the unenforceability of any
provision hereof (or the modification of any provision hereof to conform with
such laws or public policies, as provided in the next sentence) shall not render
unenforceable or impair the remainder of this Agreement. Accordingly, if any
provision shall be determined to be invalid or unenforceable either in whole or
in part, this Agreement shall be deemed amended to delete or modify, as
necessary, the invalid or unenforceable provisions and to alter the balance of
this Agreement in order to render the same valid and enforceable, consistent (to
the fullest extent possible) with the intent and purposes hereof.
22
<PAGE>
Section 13.8 Miscellaneous.
The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. This Agreement constitutes the entire agreement, and supersedes all
prior agreements and understandings, both written and oral, between the parties
with respect to the subject matter hereof. This Agreement may be executed in one
or more counterparts, each of which will be deemed an original, and all of which
together shall constitute one and the same instrument. This Agreement and the
legal relations among the parties hereto shall be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
Delaware, without regard to the conflict of laws rules thereof (except to the
extent that (x) provisions of the Colorado Act shall be mandatorily applicable
to the Digital Merger or this Agreement and (y) provisions of the Oklahoma Act
shall be mandatorily applicable to the Enterprises Merger or this Agreement).
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
TELE-COMMUNICATIONS, INC. TCI K-1, INC.
By: By:
----------------------------- -----------------------------
Name: Name:
Title: Title:
TCI COMMUNICATIONS, INC. UNITED ARTISTS K-1 INVESTMENTS, INC.
By: By:
----------------------------- -----------------------------
Name: Name:
Title: Title:
TEMPO ENTERPRISES, INC. TCISE PARTNER 1, INC.
By: By:
----------------------------- -----------------------------
Name: Name:
Title: Title:
TCI DIGITAL SATELLITE TCISE PARTNER 2, INC.
ENTERTAINMENT, INC.
By:
By: -----------------------------
----------------------------- Name:
Name: Title:
Title:
TCI TECHNOLOGY VENTURES, INC. TCI SATELLITE ENTERTAINMENT, INC.
By: By:
----------------------------- -----------------------------
Name: Name:
Title: Title:
24
<PAGE>
EXHIBIT A
Form of Subsidiary Note
-----------------------
[Intentionally Omitted]
A-1
<PAGE>
EXHIBIT B
Form of Company Note
--------------------
[Intentionally Omitted]
B-1
<PAGE>
EXHIBIT C
Form of Company Charter
-----------------------
[Intentionally Omitted]
C-1
<PAGE>
EXHIBIT D
Form of Company Stock Option Agreement
--------------------------------------
[Intentionally Omitted]
D-1
<PAGE>
SCHEDULE 8.5(d)
Company Stock Options
---------------------
<TABLE>
<CAPTION>
Grantee Percentage
------- ----------
<S> <C>
Brendan R. Clouston 1%
Larry E. Romrell 1%
David P. Beddow 1/2%
</TABLE>
S-1
<PAGE>
SCHEDULE 10.1(b)
Certain Agreements
------------------
1. Transition Services Agreement dated as of _____________, 1996, between
Tele-Communications, Inc. ("TCI") and TCI Satellite Entertainment, Inc.
(the "Company").
2. Trade Name and Service Mark License Agreement dated as of _____________,
1996, between TCI and the Company.
3. Tax Sharing Agreement dated as of July 1, 1995, among TCI, TCIC and the
other parties thereto, as amended.
4. Indemnification Agreement dated as of _____________, 1996, between TCI
UA 1, Inc. and the Company.
5. Indemnification Agreement dated as of _____________, 1996, between TCI
Technology Ventures, Inc. and the Company.
6. Indemnification Agreement dated as of _____________, 1996, between TCIC
and the Company.
7. Fulfillment Agreement dated as of September __, 1996, between TCI
Communications, Inc. and the Company.
S-2
<PAGE>
TRANSITION SERVICES AGREEMENT
Transition Services Agreement (this "Agreement"), dated as of
November ___, 1996, between Tele-Communications, Inc., a Delaware corporation
("TCI"), and TCI Satellite Entertainment, Inc., a Delaware corporation (the
"Company").
RECITALS
A. TCI owns all the issued and outstanding capital stock of the
Company (the "Company Stock").
B. TCI intends to distribute (the "Distribution") the Company Stock
to the holders of its Tele-Communications, Inc. Series A TCI Group Common Stock
and Tele-Communications, Inc. Series B TCI Group Common Stock. As a result of
the Distribution, the Company will cease to be a subsidiary of TCI, and TCI and
the Company will be separate public companies.
C. This Agreement sets forth the general terms upon which, for a
period following the Distribution, TCI will provide to the Company certain
services and other benefits, including certain services currently being provided
to the Company by TCI.
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, TCI and the Company hereby agree
as follows:
Section 1. Services. At the request of the Company, TCI shall provide
- ---------- --------
services to the Company for the administration and operation of the businesses
of the Company and its subsidiaries and affiliates and shall devote thereto such
time as may be necessary for the proper and efficient administration and
operation of such businesses. The services to be provided by TCI to the Company
pursuant to this Agreement (collectively, the "Services") shall include such of
the following services as the Company may request from time to time:
(i) tax reporting, financial reporting, payroll, employee
benefit administration, workers' compensation administration,
telephone, fleet management, package delivery, management information
systems, billing, lock box, remittance processing and risk management
services;
(ii) other services typically performed by TCI's accounting,
finance, treasury, corporate, legal, tax, benefits, insurance,
facilities, purchasing, fleet management and advanced information
technology department personnel;
<PAGE>
(iii) use of telecommunications and data facilities and of
systems and software developed, acquired or licensed by TCI from time
to time for financial forecasting, budgeting and similar purposes,
including without limitation any such software for use on personal
computers, in any case to the extent available under copyright law or
any applicable third-party contract;
(iv) technology support and consulting services; and
(v) such other management, supervisory, strategic planning or
other services as the Company and TCI may from time to time mutually
determine to be necessary or desirable.
Section 2. Supply Commitments.
- --------- ------------------
(a) Certain Definitions. As used in this Agreement, the capitalized
terms listed below have the following meanings (with the singular including the
plural and vice versa):
"Equipment": Home satellite dishes, satellite receivers and other
---------
equipment and materials that are available for purchase by TCI and its O&O
Subsidiaries on terms that include volume discounts and would not restrict TCI
or the applicable O&O Subsidiary from complying with Section 2(b).
"O&O Program Services": Each Programming Service that is wholly
--------------------
owned by TCI or one or more of its O&O Subsidiaries.
"O&O Subsidiaries": Those of TCI's subsidiaries in which TCI
----------------
owns, directly or indirectly, all of the equity.
"Programming Service": Programming (including, without
-------------------
limitation, entertainment, informational, educational and home shopping
programming) that is received (whether by a distributor or a customer) via
satellite.
"Satellite Business": The business of operating direct-to-
------------------
customer satellite delivery systems.
"Supply Commitments": The Equipment Commitment made by TCI to the
------------------
Company in Section 2(b) and the Programming Commitment made by TCI to the
Company in Section 2(c).
"Territory": The United States and Canada.
---------
(b) Equipment Purchase Commitment. TCI shall, and shall cause its O&O
Subsidiaries to, make available to the Company in the manner provided below the
benefit
-2-
<PAGE>
of the volume discounts, if any, that are available to TCI and its O&O
Subsidiaries in purchasing Equipment (the foregoing being referred to herein as,
TCI's "Equipment Commitment"). The Company shall give TCI notice from time to
time, as much in advance as is practicable, of its intention to purchase
Equipment and, promptly after receipt of such notice but in any event not more
than 10 days thereafter, TCI shall give notice to the Company stating the price
and the terms on which TCI, or the applicable O&O Subsidiary, can make such
Equipment available to the Company (the "Terms Notice"). If the Company
determines to purchase the requested Equipment on the terms specified in the
Terms Notice, it shall deliver a purchase order for such Equipment to TCI and,
upon receipt thereof, (i) TCI shall use commercially reasonable efforts to cause
its supplier to sell such Equipment directly to the Company at the price and on
the terms specified in the Terms Notice or (ii) at TCI's sole election, TCI
shall, or shall cause the applicable O&O Subsidiary to, purchase such Equipment
and resell it to the Company at the price and on the terms specified in the
Terms Notice. If TCI elects the option set forth in clause (ii) of the preceding
sentence, it shall take all action necessary to assure that all warranties and
other rights available to the original purchaser of such Equipment are assigned
and extend to, or otherwise enforce such warranties and rights on behalf of, the
Company. TCI shall in no event have, or be required to incur, any liability to
any of its suppliers for any Equipment ordered by the Company unless (and then
only to the extent that) it has elected the option set forth in clause (ii) of
the second preceding sentence.
(c) Programming Supply Commitment. With respect to each O&O Program
-----------------------------
Service, TCI shall, or shall cause the applicable O&O Subsidiary to, offer to
provide such Programming Service to the Company for distribution to the
subscribers of its Satellite Business ("Satellite Subscribers") in the Territory
on most-favored-customer terms and conditions ("MFN") (the foregoing being
referred to herein as, TCI's "Programming Commitment"). The Company's
distribution to its Satellite Subscribers of each O&O Program Service offered to
and accepted by it shall be subject to a term-by-term MFN against all other
distributors distributing such O&O Program Service by means of the same
technology to a number of subscribers that is equal to or less than the number
of Satellite Subscribers of such O&O Program Service (a "Comparable
Distributor") (i.e., a size-based MFN), on each and every material term,
provision, covenant and consideration given to or accepted from any of such
distributors, taken as a whole. After giving effect to the foregoing, it is the
intent of the parties that the Company's rates for the O&O Program Services in
its Satellite Business shall not be higher than the lowest rate(s) given to any
Comparable Distributor in the same distribution technology. The availability of
any such rate(s) may be subject to conditions that are logically linked to such
lower rate(s), and which conditions provide a direct, immediate or foreseeable,
economic and quantifiable benefit to TCI or the applicable O&O Subsidiary (e.g.
channel placement discounts, multiple service carriage incentives or tiering
rate(s)). Notwithstanding the foregoing, any such condition must relate
exclusively to the O&O Program Service for which such lower rate(s) is offered.
If a more favorable term is given to or accepted from any Comparable Distributor
of an O&O Program Service, then TCI shall promptly notify the Company of such
more favorable
-3-
<PAGE>
term and shall, or shall cause the applicable O&O Subsidiary to, offer the
Company such more favorable term for the same amount of time that such more
favorable term is or was available to such distributor for such O&O Program
Service. The Company shall accept or reject such more favorable term within
thirty (30) days of receipt of notice from TCI, and if the Company does not
accept or reject such more favorable term within such thirty (30)-day period,
then the Company shall be deemed to have rejected such more favorable term.
Without limiting the foregoing, TCI shall, or shall cause the applicable O&O
Subsidiary to, offer the Company as part of all present and future affiliation
agreements entered into by TCI or any of its affiliated companies with respect
to any O&O Program Service, the MFN set forth in this Section 2(c) for
distribution of such O&O Program Service in the Satellite Business. TCI and the
Company acknowledge that the Company now purchases and for the foreseeable
future will purchase its programming requirements from PRIMESTAR Partners, L.P.
("PRIMESTAR"). Accordingly, in order to effectuate the intent of the foregoing
provisions of this Section 2(c), TCI will use its good faith efforts to
negotiate an arrangement with PRIMESTAR whereby the benefits of the foregoing
provisions of this Section 2(c) are passed through PRIMESTAR to the Company;
provided, however, that no such arrangement shall expand the obligations of TCI
hereunder, whether to include any other partner of PRIMESTAR or otherwise.
(d) Termination of Commitments. TCI's obligations under this Section
--------------------------
2, including its Supply Commitments, shall terminate immediately and without any
requirement of notice if any of the events described in clauses (ii) and (iii)
of the first sentence of Section 4(b) shall occur with respect to the Company.
If the Company delivers an executed purchase order for Equipment to TCI pursuant
to Section 2(a) and fails to purchase the same in accordance with the terms and
conditions specified in the Terms Notice, then TCI may terminate the Equipment
Commitment and its obligations under Section 2(b) by giving notice to such
effect to the Company within 30 days thereafter. Further, if the Company fails
to make payments required for any O&O Program Services provided to it pursuant
to Section 2(c) as and when due and such failure continues beyond the expiration
of any applicable grace period, then TCI may terminate the Programming
Commitment and its obligations under Section 2(c) by giving notice to such
effect to the Company within 30 days thereafter.
Section 3. Compensation for Services and Supply Commitments. As compensation
- --------- ------------------------------------------------
for Services rendered to the Company pursuant to this Agreement and for the
Supply Commitments, the Company (i) shall reimburse TCI for all direct, out-of-
pocket expenses to third parties actually incurred by TCI in providing such
Services, provided that the incurrence of such expenses is consistent with
practices generally followed by TCI in managing or operating its own business
and the businesses of its subsidiaries and affiliates and (ii) shall pay to TCI
$1.50 per Subscriber per month (the "Subscriber Fee"), up to a maximum of
$3,000,000 per month, commencing with the month of January 1997. TCI shall keep
true, complete and accurate books of account containing such particulars as may
be necessary for the purpose of calculating the above expenses. Reimbursement
amounts pursuant to clause (i) of the first sentence of this Section 3 shall be
billed quarterly by TCI and shall be due and
-4-
<PAGE>
payable in full within 30 days after receipt of invoice. Amounts payable
pursuant to clause (ii) of the first sentence of this Section 3 shall be payable
monthly in arrears on the last day of each calendar month based on the number of
Subscribers as of the end of the immediately preceding calendar month. For
purposes hereof, a "Subscriber" is a single family household, residential
dwelling unit in a multiple dwelling unit (e.g. an apartment, condominium, etc.)
or commercial establishment (e.g. a bar, hotel, etc.) (in each case, counted as
one subscriber regardless of the number of IRDs (as such term is commonly
understood in the satellite industry)), that pays the Company or a subsidiary
thereof the monthly price for its satellite service and has paid at least one
month's charges in full, but excluding any such household, dwelling unit or
commercial establishment whose account with the Company remains unpaid for more
than 30 days from the original date of billing therefor. The Company shall keep
true, complete and accurate books of account containing such particulars as may
be necessary for the determination of the number of its Subscribers.
Section 4. Term.
- --------- ----
(a) Term. This Agreement shall become effective on the date of the
----
Distribution and shall continue until the close of business on December 31, 1999
(the "Initial Term") and shall be renewed automatically for successive one-year
periods thereafter (each a "Renewal Term"), unless earlier terminated in
accordance with Section 4(b).
(b) Termination. Except as otherwise expressly provided herein, this
-----------
Agreement and the rights and obligations of the parties hereunder shall remain
in effect until terminated as provided below or, with respect to the parties'
rights and obligations under Sections 2(b) and 2(c), as provided in Section
2(d):
(i) Either party may terminate this Agreement effective as of
the end of the Initial Term or the then current Renewal Term, as
applicable, by giving not less than 180 days prior written notice to
the other party.
(ii) TCI may terminate this Agreement upon written notice to the
Company if any person or group (other than TCI, any subsidiary of TCI
or any Controlling Person of the Company or TCI) acquires beneficial
ownership of shares of capital stock representing 50% or more, by
voting power, of the outstanding shares of voting capital stock of the
Company.
(iii) Either party may terminate this Agreement upon written
notice to the other party if such other party shall file a petition in
bankruptcy or insolvency, or a petition for reorganization or
adjustment of debts or for the appointment of a receiver or trustee of
all or a substantial portion of its property, or shall make an
assignment for the benefit of creditors, or if a petition in
-5-
<PAGE>
bankruptcy or other petition described in this paragraph shall be
filed against such other party and shall not be discharged within 120
days thereafter.
For purposes of this Section 4(b), the term "beneficial ownership" shall be
defined and construed in accordance with Rule 13d-3 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the term "group" shall be
defined and construed in accordance with Section 13(d) of the Exchange Act. In
addition, for purposes of this Section 4(b), "Controlling Person" shall mean as
to any person each of (1) the Chairman of the Board of such person as of the
date of this Agreement, (2) the President of such person as of the date of this
Agreement, (3) each of the directors of such person as of the date of this
Agreement, (4) the respective family members, estates and heirs of each of the
persons referred to in clauses (1) through (3) above and any trust or other
investment vehicle for the primary benefit of any of such persons or their
respective family members or heirs, (5) Kearns-Tribune Corporation, a Delaware
corporation or any successor thereto by merger or consolidation and (6) the
trustee under the qualified employee stock purchase plan or any successor plan
of such person. As used with respect to any person, the term "family member"
means the spouse, siblings and lineal descendants of such person. The trustee
under the qualified employee stock purchase plan or any successor plan of any
person shall be deemed to have beneficial ownership of all shares of common
stock of such person held under the plan, whether or not allocated to or vested
in participants' accounts.
(c) Effect of Termination. In the event of any termination of this
---------------------
Agreement, each party shall remain liable for all obligations of such party
accrued hereunder prior to the date of such termination, including, without
limitation, all obligations of the Company (i) to reimburse TCI for services
provided hereunder through the termination date and to pay the Subscriber Fee
for the month in which the termination date occurs (provided that if the
termination occurs prior to the last calendar day of a month, such fee shall be
prorated based on the number of days elapsed in such month prior to and
including the termination date), in each case as provided in Section 3 hereof,
and (ii) to pay for any Equipment or Programming Service supplied pursuant
hereto. The provisions of Section 5 of this Agreement shall survive
indefinitely, notwithstanding any termination hereof.
Section 5. Limitation of Liability. TCI, its affiliates, directors, officers,
employees, agents and permitted assigns (each, a "TCI Party" and, together, the
"TCI Parties") shall not be liable (whether such liability is direct or
indirect, in contract or tort or otherwise) to the Company or any of the
Company's affiliates, directors, officers, employees, agents, securityholders,
creditors or permitted assigns, for any liabilities, claims, damages, losses or
expenses (including, without limitation, any special, indirect, incidental or
consequential damages) ("Losses") arising out of, related to, or in connection
with the Services, the Supply Commitments or this Agreement, except to the
extent that such Losses result from the gross negligence or willful misconduct
of TCI, in which case TCI's liability with respect to the Services shall be
limited to a refund of that portion of the amounts actually paid by the Company
hereunder which, as determined by TCI, represented the cost to the Company of
the Services in question. With
-6-
<PAGE>
regard to the Supply Commitments, the remedies, if any, available with respect
to any Equipment or Programming Service supplied shall be as provided in the
applicable purchase order or supply contract. In the event of any willful
failure to perform the applicable Supply Commitment, the Company shall not be
obligated to make any further payments of the Subscriber Fee until the Supply
Commitments are honored and shall be entitled to reimbursement of the Subscriber
Fee paid with respect to any period in which TCI has failed or refused to honor
its Supply Commitments. The Company hereby agrees to indemnify and hold harmless
the TCI Parties from and against any and all Losses (including, without
limitation, reasonable fees and expenses of counsel) incurred by any TCI Party
arising out of or in connection with or by reason of this Agreement or any
Services, Equipment or Programming Services provided by TCI hereunder, other
than any liability of TCI to the Company as contemplated by the foregoing
provisions of this Section 5.
Section 6. Miscellaneous.
(a) Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all previous agreements, negotiations, understandings and
commitments with respect to such subject matter, whether or not in writing.
(b) Governing Law. This Agreement and the legal relations between
-------------
the parties with respect hereto shall be governed by and construed in accordance
with the laws of the State of Colorado, without regard to conflicts of laws
rules thereof.
(c) Notices. All notices, demands and other communications under
-------
this Agreement shall be in writing and shall be deemed to have been duly given:
(i) on the day of delivery if delivered personally to the party to whom notice
is to be given; (ii) on the day of transmission if sent via facsimile
transmission to the facsimile number given below (answer back received);
(iii) on the day of delivery by Federal Express or similar overnight courier; or
(iv) on the third day after mailing, if mailed to the party to whom notice is to
be given, by United States first class mail, registered or certified, postage
prepaid and properly addressed, to the party as follows:
If to TCI:
Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attention: General Counsel
Facsimile: (303) 488-3245
-7-
<PAGE>
If to the Company:
TCI Satellite Entertainment, Inc.
8085 South Chester, Suite 300
Englewood, Colorado 80112
Attention: Gary S. Howard, President
Facsimile: (303) 712-4977
with a separate copy to the Company's Corporate Counsel at the same
address.
Any party may change its address for the purpose of this Section by giving the
other party written notice of its new address in the manner set forth above.
(d) Amendment. This Agreement may not be amended or modified in any
---------
respect except by a written agreement signed by the parties hereto.
(e) Successors and Assigns; No Third-Party Beneficiaries. This
----------------------------------------------------
Agreement and all of the provisions hereof shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and permitted
assigns. Neither this Agreement nor any of the rights, interests and obligations
hereunder shall be assigned by either party hereto, by operation of law or
otherwise, without the prior written consent of the other party. Nothing
contained in this Agreement, except as expressly set forth, is intended to
confer upon any other persons other than the parties hereto and their respective
successors and permitted assigns, any rights or remedies.
(f) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(g) No Waiver. No waiver by either party hereto of any term or
---------
condition of this Agreement, in any one or more instances, shall operate as a
waiver of such term or condition at any other time. No waiver of any term or
condition hereof shall be effective unless in a writing signed by the party
entitled to give such waiver.
(h) Relations between the Parties. The parties are independent
-----------------------------
contractors. Nothing in this Agreement shall constitute either party, or any of
such party's officers, directors, agents or employees, a partner, agent or
employee of, or joint venturer with, the other party.
(i) Severability. If any provision of this Agreement or the
------------
application thereof to any person or circumstance shall be held to be invalid or
unenforceable, the remainder of this Agreement, or the application of such
provision to persons or circumstances other than those to which it was held to
be invalid or unenforceable, shall not be affected thereby, provided that the
parties shall negotiate in good faith with respect to an equitable modification
of the provision or application thereof held to be invalid.
-8-
<PAGE>
(j) Confidentiality. All information obtained by TCI or the Company
---------------
concerning the other pursuant to this Agreement shall, except as required in the
performance hereof or by law, be maintained in confidence by TCI, the Company
and their respective employees.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first written above.
TELE-COMMUNICATIONS, INC.
By:
------------------------------
Name:
Title:
TCI SATELLITE ENTERTAINMENT, INC.
By:
------------------------------
Name:
Title:
-10-
<PAGE>
EXHIBIT 2.5
TAX SHARING AGREEMENT
This Tax Sharing Agreement (the "Agreement") sets forth the allocation
and sharing arrangement with respect to federal, state, local and foreign taxes
among Tele-Communications, Inc., a Delaware corporation ("TCI"), Liberty Media
Corporation, a Delaware corporation that is a wholly owned subsidiary of TCI
("Liberty"), each other corporation that is a Subsidiary of Liberty (each,
together with Liberty, the "Liberty Subgroup"), Tele-Communications
International, Inc., a Delaware corporation that is a wholly owned subsidiary of
TCI (but stock in which will in the near future be offered to the public for
purchase) ("International"), each other corporation that is a Subsidiary of
International (each, together with International, the "International Subgroup"),
TCI Technology Ventures, Inc., a Delaware corporation that is a wholly owned
subsidiary of TCI ("Technology"), each other corporation that is a Subsidiary of
Technology, and each member of the WTCI Subgroup (each, together with
Technology, the "Technology Subgroup"), TCI Communications, Inc., a Delaware
corporation that is a wholly owned subsidiary of TCI ("TCIC") and each other
corporation that is a Subsidiary of TCIC, other than any member of the WTCI
Subgroup (each, together with TCIC, the "TCIC Subgroup") and TCI Cable
Investments, Inc., a Delaware corporation that is a wholly owned subsidiary of
TCI ("TCICI") and each other corporation that is a Subsidiary of TCICI (each,
together with TCICI, the "TCICI Subgroup"). TCI is the common parent, and each
member (a "Subgroup Member") of the Liberty Subgroup, the International
Subgroup, the Technology Subgroup, the TCIC Subgroup and the TCICI Subgroup
(each, a "Subgroup") is a member, of an
1
<PAGE>
Affiliated Group (the "TCI Group") which files a consolidated federal income tax
return pursuant to Section 1501 of the Code.
A. Definitions. As used in this Agreement, the following terms
-----------
shall have the following meanings:
"Affiliated Group" has the meaning ascribed thereto in Section 1504(a)
of the Code.
"Alternative Minimum Tax" means the Tax imposed by Section 55 of the
Code.
"AMT Credit" means a credit against regular federal income tax under
Section 53 of the Code.
"Code" means the Internal Revenue Code of 1986, as amended.
"Effective Date" means July 1, 1995.
"Federal Tax Benefit," as to any Subgroup Member, shall mean the
amount determined with respect to such Subgroup Member under Section C.2.
hereof, as adjusted pursuant to any other provision hereof.
"Federal Tax Liability," as to any Subgroup Member, shall mean the
amount determined with respect to such Subgroup Member under Section C.1.
hereof, as adjusted pursuant to any other provision hereof.
"Final Determination" means the final resolution of liability for any
Tax for a taxable period, including any related interest and penalties, (i)
pursuant to IRS Form 870-AD (or any successor form thereto), on the date of
acceptance by or on behalf of the IRS, or by a comparable agreement form under
the laws of any state, local or foreign government or the rules or regulations
2
<PAGE>
of any state, local or foreign taxing authority, except that a Form 870-AD or
comparable form that reserves the right of the taxpayer to file a claim for
refund and/or the right of the taxing authority to assert a further deficiency
shall not constitute a Final Determination with respect to the items so
reserved; (ii) by a decision, judgment, decree or other order by a court of
competent jurisdiction, which has become final and nonappealable; (iii) by a
closing agreement or offer in compromise under Section 7121 or 7122 of the Code,
or comparable agreements under the laws of any state, local or foreign
government or the rules or regulations of any state, local or foreign taxing
authority; (iv) by any allowance of a refund or credit in respect of an
overpayment of Tax, including any related interest or penalties, but only after
the expiration of all periods during which such refund may be recovered
(including by way of offset) by the jurisdiction imposing the Tax (including a
refund or credit allowed as a result of the filing of an amended return); (v) by
any other final disposition by reason of the expiration of the applicable
statute of limitations; or (vi) by the occurrence of any event which the
parties agree in writing is a Final Determination.
"include" and derivatives thereof are used in an illustrative and not
a limitative sense.
"IRS" means the Internal Revenue Service.
"Post-Deconsolidation Correlative Amounts" means all payments made
pursuant to this Agreement which are not in settlement of a tax liability but
are correlative thereto (e.g., interest, penalties, additions to tax, or costs
of contesting a proposed adjustment under Section F.3. hereof) and which are
neither paid nor accrued on or before the Deconsolidation Date (as defined
below).
3
<PAGE>
"State or Local Tax Liability," as to any Subgroup, shall mean the
amount determined with respect to such Subgroup under Section D.1. hereof, as
adjusted pursuant to any other provision hereof.
"Subsidiary," as to any Subgroup Parent, means any corporation that
would be included in the Affiliated Group of which such Subgroup Parent would be
the common parent if such Subgroup Parent were not a member of any other
Affiliated Group, except that, for all purposes hereof, all members of the WTCI
Subgroup shall be deemed to be Subsidiaries of Technology and not of TCIC.
"Subgroup Parent" means each of Liberty, International, Technology,
TCIC and TCICI.
"Tax Benefit" means, as to any Subgroup Member, a Federal Tax Benefit
of such Subgroup Member.
"Tax Item" means any item of income, gain, loss, deduction or tax
credit.
"Tax Liability" means (i) as to any Subgroup Member, a Federal Tax
Liability of such Subgroup Member, or (ii) as to any Subgroup, a State or Local
Tax Liability of such Subgroup.
"Tax Return" means any return, filing, questionnaire or other document
required to be filed for a period with any taxing authority (whether domestic or
foreign) in connection with any Taxes (whether or not a payment is required with
respect to such filing).
"Taxes" means all forms of taxation, whenever created or imposed, and
whether by the United States or a foreign governmental entity, or by a local,
municipal, governmental, tribal, state, federation or other body, and shall
include income, sales, use, ad
4
<PAGE>
valorem, gross receipts, value added, franchise, transfer, recording,
withholding, payroll, employment, excise, occupation, premium or property taxes,
together with related interest, penalties and additions to tax, or additional
amounts imposed by any taxing authority (domestic or foreign) upon the TCI Group
or any Subgroup or any of their respective members or branches. Notwithstanding
the foregoing, however, the term "Taxes" shall not include unclaimed property or
escheat taxes.
"TCI Unitary Group," means, as to any state or local taxing
jurisdiction, the unitary or consolidated group of which TCI is the common
parent and which is subject to state or local income Taxes in such jurisdiction.
"WTCI" means Western Tele-Communications, Inc., a Delaware
corporation.
"WTCI Subgroup" means WTCI and any corporation that would be included
in the Affiliated Group of which WTCI would be the common parent if WTCI were
not a member of any other Affiliated Group.
B. Intercompany Accounts.
---------------------
1. Maintenance. Beginning on the Effective Date, TCI shall establish
-----------
and maintain a separate account between it and each Subgroup Parent (the
"Intercompany Accounts"). As provided herein, the Intercompany Account for each
Subgroup Parent shall be credited with any Tax Benefit attributable to such
Subgroup Parent's Subgroup or any Subgroup Member thereof and shall be charged
with any Tax Liability attributable to such Subgroup Parent's Subgroup or any
Subgroup Member thereof.
5
<PAGE>
2. Treatment at Deconsolidation.
----------------------------
a. On the date that any Subgroup Parent ceases to be a member of the
TCI Group (the "Deconsolidation Date"), TCI shall pay to such Subgroup Parent an
amount equal to any credit balance in the Intercompany Account attributable to
such Subgroup Parent, and such Subgroup Parent shall pay to TCI an amount equal
to any debit balance in such Intercompany Account, after which payment such
Intercompany Account shall be closed.
b. At such time as TCI has prepared all the Tax Returns for all
taxable periods and portions thereof ending on or before the Deconsolidation
Date as to any Subgroup Parent, and in any event within 180 days after the
Deconsolidation Date, (x) TCI shall pay such Subgroup Parent any net amount
that would have been credited hereunder to the Intercompany Account of such
Subgroup Parent after the Deconsolidation Date had such Subgroup Parent
continued to be a member of the TCI Group and (y) such Subgroup Parent shall pay
TCI any net amount that would have been debited hereunder to the Intercompany
Account of such Subgroup Parent after the Deconsolidation Date had such Subgroup
Parent continued to be a member of the TCI Group. Any such amounts becoming due
or owing hereunder after the Deconsolidation Date shall be settled in cash as
between such Subgroup Parent and TCI.
C. Federal Income Taxes.
--------------------
1. Federal Tax Liability. For each taxable year or part thereof
---------------------
ending after the Effective Date that a Subgroup Member is a member of the TCI
Group, the Federal Tax Liability of such Subgroup Member shall be equal to the
sum of:
a. The amount by which (i) the product of (x) the amount of taxable
income attributable to such Subgroup Member for such period calculated, in
accordance with
6
<PAGE>
Treasury Regulations section 1.1552-1(a)(1)(ii), as though such Subgroup Member
were required to file a separate corporate federal income tax return pursuant to
the Code for such period multiplied by (y) the maximum corporate federal income
tax rate in effect for such taxable year or part thereof exceeds (ii) the amount
of tax credits attributable to such Subgroup Member (whether attributable to
such taxable year or part thereof or carried to such taxable year or part
thereof from another taxable year) that are actually utilized by the TCI Group
to reduce its consolidated federal income tax liability for such period; plus
b. The product of (x) the amount of modified alternative minimum
taxable income, within the meaning of Section 59A(b) of the Code, attributable
to such Subgroup Member for such period calculated, in accordance with Treasury
Regulations section 1.1552-1(a)(1)(ii), as though such Subgroup Member were
required to file a separate corporate federal income tax return for such period
multiplied by (y) the statutory rate set forth in Section 59A(a) of the Code.
2. Federal Tax Benefit. For each taxable year or part thereof ending
--------------------
after the Effective Date that a Subgroup Member is a member of the TCI Group,
the Federal Tax Benefit of such Subgroup Member shall be equal to the sum of:
a. The product of (i) the amount of taxable loss attributable to such
Subgroup Member (whether attributable to such taxable year or part thereof or
carried to such taxable year or part thereof from another taxable year) and
actually used by the TCI Group during such taxable year or part thereof to
reduce its consolidated federal income tax liability, calculated in accordance
with Treasury Regulations section 1.1552-1(a)(1)(ii) (without regard to the last
sentence thereof), as though such Subgroup Member were required to file a
separate corporate
7
<PAGE>
federal income tax return pursuant to the Code for such period, multiplied by
(ii) the maximum corporate federal income tax rate in effect during such taxable
year or part thereof; plus
b. The product of (x) the amount by which zero exceeds the
alternative minimum taxable income, within the meaning of Section 56(d) of the
Code, attributable to such Subgroup Member for such period and used by the TCI
Group to reduce its consolidated modified alternative taxable income (within the
meaning of Section 59A(b) of the Code), such alternative minimum taxable income
to be calculated, in accordance with Treasury Regulations section 1.1552-
1(a)(1)(ii) (without regard to the last sentence thereof), as though such
Subgroup Member were required to file a separate corporate federal income tax
return for such period, multiplied by (y) the statutory rate set forth in
Section 59A(a) of the Code.
3. Alternative Minimum Tax and AMT Credit. For each taxable year or
---------------------------------------
portion thereof that a Subgroup Member is a member of the TCI Group, the Federal
Tax Liability and Federal Tax Benefit of such Subgroup Member shall be computed
without regard to the Alternative Minimum Tax and the AMT Credit, and the
Alternative Minimum Tax shall be paid by, and any tax benefit attributable to
the AMT Credit shall be reserved to, TCI.
4. Time of Determination; Credits and Charges to the Intercompany
--------------------------------------------------------------
Accounts. The estimated Federal Tax Benefit and Federal Tax Liability of each
- ---------
Subgroup Member shall be calculated by TCI as promptly as practicable after the
close of each calendar quarter in each taxable year, and the appropriate credits
or charges made to the Intercompany Accounts. As soon as practicable after the
close of each taxable year, TCI shall determine the final Federal Tax Benefit or
final Federal Tax Liability of such Subgroup Member for such taxable year and
shall:
8
<PAGE>
a. credit the Intercompany Account of the Subgroup Parent of such
Subgroup Member with the amount by which:
(1) such final Federal Tax Benefit for such taxable year exceeds the
aggregate credits for estimated Federal Tax Benefits made to such Intercompany
Account with respect to such Subgroup Member for such taxable year, or
(2) the aggregate charges for estimated Federal Tax Liability made to
such Intercompany Account with respect to such Subgroup Member for such taxable
year exceed such final Federal Tax Liability for such taxable year; and
b. charge the Intercompany Account of the Subgroup Parent of such
Subgroup Member with the amount by which:
(1) the aggregate credits for estimated Federal Tax Benefits made to
such Intercompany Account with respect to such Subgroup Member for such taxable
year exceed such final Federal Tax Benefit for such taxable year; or
(2) such final Federal Tax Liability for such taxable year exceeds the
aggregate charges for estimated Federal Tax Liability made to such Intercompany
Account with respect to such Subgroup Member for such taxable year.
For purposes of this Section C.4., for the first two calendar quarters of 1995,
the Intercompany Account of each Subgroup Parent shall be deemed to have been
credited or charged, as the case may be, with the estimated Federal Tax Benefit
or Federal Tax Liability for which each member of such Subgroup Parent's
Subgroup was credited or charged with respect to such calendar quarters in
connection with the preparation of the financial statements of such Subgroup
Member for such calendar quarters.
9
<PAGE>
5. Filings and Procedural Matters.
------------------------------
a. TCI shall continue to prepare and file all federal income Tax
Returns (the "TCI Consolidated Returns") which are required to be filed by the
TCI Group for all periods and will pay all Taxes shown as due thereon. The
costs of such preparation and filing shall be allocated among and paid by the
Subgroup Parents in accordance with TCI's policy of allocating corporate general
and administrative costs among the Subgroups. Such returns shall include all
Tax Items of the Subgroup Members for all tax periods or portions thereof ending
on or before the Deconsolidation Date with respect to such Subgroup Members.
TCI will make all decisions relating to the preparation and filing of such
returns. Each Subgroup Member whose Tax Items are includable in any such return
shall, upon the request of TCI, consent to be included in the TCI Consolidated
Return on any form as may be prescribed for such consent.
b. So as to enable TCI to prepare accurately and completely the TCI
Consolidated Returns and in order to provide for accurate financial reporting,
for tax periods or portions thereof ending on or before the Deconsolidation Date
as to any Subgroup Parent, such Subgroup Parent shall provide such information
with respect to Taxes (including forecasts, projections and tax accruals) as TCI
may reasonably request. Each Subgroup Parent shall bear all costs and expenses
of preparation and submission of such information, including accountants' and
attorneys' fees.
c. TCI may claim the benefit for federal income tax purposes of any
net operating loss or other tax benefit carryback resulting from a loss or tax
benefit incurred by any Subgroup Member for any taxable period after the
Deconsolidation Date of such Subgroup Member, provided that TCI pays to such
Subgroup Member the amount of any refund of Taxes resulting from
10
<PAGE>
such net operating loss or other tax benefit carryback, together with the
interest received in respect of such refund, promptly after receipt thereof from
the IRS. However, with respect to any such net operating loss or other tax
benefit that is attributable to a taxable period of a Subgroup Member after the
Deconsolidation Date with respect to such Subgroup Member and as to which such
Subgroup Member has the option to waive its right to carry such net operating
loss or other tax benefit back, such Subgroup Member shall exercise such option
and elect to carry such net operating loss or other tax benefit forward unless
either (x) TCI requests such Subgroup Member not to exercise such option and
instead to carry such net operating loss back to a period prior to the
Deconsolidation Date with respect to such Subgroup Member or (y) TCI consents in
writing to the failure of such Subgroup Member to exercise such option to waive
such carryback period. If such Subgroup Member fails to exercise any such
option to waive the right to carry back any such net operating loss or other tax
benefit without such a request or consent from TCI, TCI shall not be obligated
to compensate such Subgroup Member for any benefit that TCI may receive from
such net operating loss or other tax benefit.
d. In the event that, after the Deconsolidation Date as to any
Subgroup Member, such Subgroup Member receives any benefit from an AMT Credit
attributable to any period ending on or before such Deconsolidation Date (by way
of reduction in federal income tax liability or otherwise), such Subgroup Member
shall promptly pay to TCI the amount of such benefit plus any associated
interest thereon. Notwithstanding anything to the contrary herein, the
provisions of this Section C.5.d. shall survive the termination of this
Agreement.
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<PAGE>
D. State or Local Taxes.
---------------------
1. State or Local Tax Liability. For each taxable year or portion
-----------------------------
thereof ending after the Effective Date that a Subgroup Parent is a member of
the TCI Group, the State or Local Tax Liability of the Subgroup of such Subgroup
Parent shall be equal to the product of:
a. the sum of the state and local income and franchise taxes
attributable to those jurisdictions in which the TCI Unitary Group is liable for
state or local income or franchise taxes with respect to the operations of any
Member of such Subgroup on a unitary, consolidated or nexus combination basis,
multiplied by
b. a fraction, (x) the numerator of which is the aggregate amount of
such tax that is attributable to such Subgroup in such jurisdictions, determined
without regard to any other Subgroup, as though such Subgroup were required to
file either a unitary, consolidated or nexus combination corporate income or
franchise tax return in such jurisdictions for such taxable year or portion
thereof, and (y) the denominator of which is the sum of all such amounts
determined with respect to all the Subgroups.
2. State or Local Tax Attributes. In calculating the amounts
------------------------------
referred to in Section D.1. above, each Subgroup will calculate state and local
net operating losses and other state and local tax attributes to which its
Subgroup Members are entitled as of the Effective Date. For each taxable year or
portion thereof ending after the Effective Date that a Subgroup Parent is a
member of the TCI Group, the amounts referred to in Section D.1. shall be
calculated by taking into account the utilization of such tax attributes as
though the Subgroup actually filed returns as described in such Section without
regard to the actual filings of the TCI Group. If any Subgroup or Subgroup
Member ceases to be a member of the TCI Group, no adjustments shall be made to
12
<PAGE>
account for differences between the tax attributes utilized in the calculations
made pursuant to Section D.1. and the Tax Returns actually filed by the TCI
Group.
3. Time of Determination; Credits and Charges to the Intercompany
--------------------------------------------------------------
Accounts. To the extent required for financial statement purposes, the
- ---------
estimated State or Local Tax Liability of each Subgroup shall be calculated by
TCI after the close of each calendar quarter in each taxable year, and the
appropriate credits or charges made to the Intercompany Accounts. As soon as
practicable after the close of each taxable year, TCI and the Subgroup Parent of
such Subgroup shall cooperate together to determine the final State or Local Tax
Liability of such Subgroup and shall:
a. credit the Intercompany Account of such Subgroup Parent with the
amount by which the aggregate charges for estimated State or Local Tax Liability
made to such Intercompany Account with respect to such Subgroup for such taxable
year exceed such final State or Local Tax Liability for such taxable year; and
b. charge the Intercompany Account of such Subgroup Parent with the
amount by which such final State or Local Tax Liability for such taxable year
exceeds the aggregate charges for estimated State or Local Tax Liability made to
such Intercompany Account with respect to such Subgroup for such taxable year.
4. Filings and Procedural Matters.
------------------------------
a. For all tax periods or portions thereof ending on or before the
Deconsolidation Date as to any Subgroup Member, TCI shall prepare and file all
unitary, consolidated, nexus combination or separate state or local income or
franchise Tax Returns which are required by law to be filed which include both
any Tax Item of such Subgroup Member and any Tax Item of either any member of a
different Subgroup or any member of the TCI Group that is not
13
<PAGE>
a Subgroup Member. TCI shall pay all Taxes shown as due on such returns
(including those for which any Subgroup Member may be liable). Each Subgroup
Member whose Tax Items are included in any such unitary, consolidated, nexus
combination or separate state or local income Tax Return shall agree to be
included on such return on any form as may be prescribed for such consent if
such consent is requested, and the costs of preparing and filing such Tax
Returns shall be allocated among the Subgroup Members whose Tax Items are
included therein in accordance with TCI's policy for allocating corporate
general and administrative costs. TCI shall prepare and file on behalf of and
at the cost and expense of each Subgroup Member all other state and local income
and franchise Tax Returns required to be filed with respect to such Subgroup
Member. Such Subgroup Member shall pay all taxes reportable on such returns.
b. So as to enable TCI accurately and completely to prepare all state
and local income and franchise Tax Returns which it will file and in order to
provide for accurate financial reporting, each Subgroup Member shall prepare and
submit to TCI such information with respect to Taxes (including forecasts,
projections and tax accruals) as TCI may reasonably request.
E. Foreign Income Taxes. TCI shall prepare and file or shall cause
---------------------
to be filed all foreign income or franchise Tax Returns which are required to be
filed for all members of the TCI Group and each member of the TCI Group will pay
all Taxes shown as due on any such Tax Return that is thus prepared and filed on
its behalf. Each Subgroup Member shall bear the costs of preparing and filing
such Tax Returns on its behalf in accordance with TCI's policy for allocating
corporate general and administrative costs.
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<PAGE>
F. Subsequent Adjustment of Tax Liability.
---------------------------------------
1. Federal, State, Local and Foreign Taxes - In General. As provided
-----------------------------------------------------
in this Section F, each Subgroup or Subgroup Member, as the case may be, shall
indemnify the TCI Group from any and all federal, state, local or foreign tax
liability resulting from any Final Determination which adjusts any Tax Item of
such Subgroup or Subgroup Member for any tax period or portion thereof that ends
after the Effective Date and on or before the Deconsolidation Date as to such
Subgroup or Subgroup Member, including any interest, penalties or additions to
tax attributable thereto (and all reasonable out-of-pocket costs incurred by the
TCI Group in connection with the assessment or collection thereof), provided,
however, that in the case of any member of the TCIC Subgroup or the TCICI
Subgroup, this sentence shall apply to any tax period or portion thereof that
ends on or before the Deconsolidation Date as to such member regardless of
whether such tax period ends before or after the Effective Date. As provided
herein, for any tax period or portion thereof ending after the Effective Date
and on or before the Deconsolidation Date as to any Subgroup or Subgroup Member,
such Subgroup or Subgroup Member shall be entitled to the benefit of all refunds
of federal, state, local or foreign taxes, and all interest attributable
thereto, resulting from any Final Determination which (x) adjusts any Tax Item
of such Subgroup or Subgroup Member, or (y) causes a tax benefit that is
attributable to such Subgroup or Subgroup Member to be utilized by another
Subgroup or Subgroup Member, provided, however, that in the case of any member
of the TCIC Subgroup or the TCICI Subgroup, this sentence shall apply for any
tax period or portion thereof that ends on or before the Deconsolidation Date as
to such member, regardless of whether such tax period ends before or after the
Effective Date. TCI shall indemnify each Subgroup Member from any increase in
federal, state, local or foreign tax liability, including interest, penalties or
additions to tax
15
<PAGE>
attributable thereto (and all reasonable out-of-pocket costs incurred by such
Subgroup Member in connection with the assessment or collection thereof), other
than any such amount for which such Subgroup Member is responsible as provided
above in this Section F.1., and TCI shall be entitled to all refunds and
interest attributable thereto other than any such refunds or interest to which
such Subgroup Member is entitled as provided in this Section F.1.
2. Determination of Indemnification Amounts. If any Final
-----------------------------------------
Determination results in an adjustment to any Tax Item of any Subgroup or
Subgroup Member, as the case may be, for any tax period or portion thereof
ending on or before the Deconsolidation Date as to such Subgroup or Subgroup
Member (and, in the case of a Subgroup Member other than a member of the TCIC
Subgroup or the TCICI Subgroup, ending after the Effective Date), and such
adjustment would affect the tax benefit or tax liability of such Subgroup or
Subgroup Member, such tax benefit or tax liability shall be redetermined, in
accordance with any applicable provision hereof, to give effect to such
adjustment, as if it had been made as part of or reflected in the Tax Return (or
other tax calculation) to which such tax benefit or tax liability relates. Such
Subgroup or Subgroup Member shall pay to TCI (or, if such Subgroup or Subgroup
Member is at such time a member of the TCI Group, the Intercompany Account of
the Subgroup Parent of such Subgroup or Subgroup Member shall be charged with)
(a) any excess of such tax benefit as originally computed over such tax benefit
as determined pursuant to such recomputation, (b) any excess of such tax
liability as determined pursuant to such recomputation over such tax liability
as originally computed, and (c) the amount of any interest, penalties, additions
to tax or expenses (as described in Section F.1.) which are paid by any member
of the TCI Group other than such Subgroup Member (or a member of the same
Subgroup as such Subgroup Member) with respect to such adjustment. Any amount
payable by a
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Subgroup or a Subgroup Member to TCI (or charged to the Intercompany Account of
the appropriate Subgroup Parent) pursuant to this Section F.2. shall be reduced
to reflect any amount paid directly by such Subgroup or Subgroup Member to any
government or taxing authority to satisfy the increased tax liability taken into
account in computing such payment. TCI shall pay to each Subgroup or Subgroup
Member, as the case may be (or, if such Subgroup or Subgroup Member is at such
time a member of the TCI Group, the Intercompany Account of the Subgroup Parent
of such Subgroup or Subgroup Member shall be credited with) (a) any excess of
such tax benefit as determined pursuant to such recomputation over such tax
benefit as originally determined, (b) any excess of such tax liability as
originally computed over such tax liability as determined pursuant to such
recomputation, and (c) the amount of any interest received by any member of the
TCI Group (other than such Subgroup Member or a member of the same Subgroup as
such Subgroup Member) from any government or taxing authority with respect to
such amount, provided that such payment (or credit to an Intercompany Account)
shall be reduced by the amount of any refund of tax received directly from any
government or taxing authority by such Subgroup or Subgroup Member with respect
to such adjustment.
3. Contests. The defense of proceedings for the assessment as to any
---------
taxable period or portion thereof ending on or before the Deconsolidation Date
as to any Subgroup or Subgroup Member of any Tax deficiencies and the
prosecution of any proceedings for the assertion of any refund claims which
arise with respect to or which relate to any member of the TCI Group, whether or
not attributable to such Subgroup or Subgroup Member, and regardless of whether
such tax period or portion thereof occurs before or after the Effective Date,
shall be conducted by TCI in such manner, including through deferral, compromise
or settlement, as TCI in its sole discretion
17
<PAGE>
shall determine, provided that TCI will consult with and keep any affected
Subgroup or Subgroup Member informed of the status of such matters and TCI will
not compromise or settle any assessment for which such Subgroup or Subgroup
Member would have an indemnification obligation hereunder or any tax refund
claim attributable to such Subgroup or Subgroup Member without the consent of
such Subgroup or Subgroup Member, as the case may be, which shall not be
unreasonably withheld. If any Subgroup or Subgroup Member shall consent to any
proposed compromise or settlement, then such Subgroup or Subgroup Member as a
consequence waives any and all present and future claims against TCI relating to
such compromise or settlement between TCI and the IRS or other taxing authority,
regardless of whether such compromise or settlement allegedly improperly causes
an overstatement of the liability of such Subgroup or Subgroup Member to TCI or
another member of the TCI Group, or whether such Subgroup or Subgroup Member
could have reached a more favorable agreement with the IRS or other taxing
authority on a separate company basis. If any affected Subgroup or Subgroup
Member shall not consent to such compromise or settlement, TCI shall renegotiate
such agreement, in cooperation with such Subgroup or Subgroup Member, and at the
expense of such Subgroup or Subgroup Member. Any compromise or settlement which
results from such renegotiation will not be entered into without the consent of
both TCI and such Subgroup or Subgroup Member. TCI will bear all costs and
expenses associated with the defense of such deficiency proceedings or the
prosecution of such refund claims, except that the affected Subgroup or Subgroup
Member shall bear the portion, if any, of such costs and expenses provided for
in Section F.1. hereof. TCI and such Subgroup or Subgroup Member will execute
and deliver such waivers, consents, petitions, refund claims, complaints, powers
of attorney and other
18
<PAGE>
documents which may be necessary or appropriate in connection with the defense,
prosecution or resolution of any such proceedings for assessment of income tax
deficiencies or refund claims.
G. Taxes Other Than Income Taxes. Except as provided in Section E
------------------------------
above or the next succeeding sentence, each Subgroup Member shall file all tax
returns and reports related to, shall defend all audits and investigations
related to, shall pay, and shall indemnify the other members of the TCI Group
from, all Taxes, other than income taxes, attributable to such Subgroup Member
for all periods before the Deconsolidation Date as to such Subgroup Member,
regardless of whether such period occurs before or after the Effective Date,
including any expenses incurred by any member of the TCI Group (including
reasonable accountants' and attorneys' fees) in connection therewith.
Notwithstanding the foregoing, so long as any Subgroup Member is a member of the
TCI Group, TCI shall (x) prepare and file all real property, ad valorem and
similar Tax Returns for such Subgroup Member and (y) provide such assistance as
such Subgroup Member may reasonably request with respect to audits of sales and
use taxes. TCI shall pay or cause to be paid, and shall indemnify each Subgroup
Member from, all Taxes, other than income taxes, attributable to the members of
the TCI Group (other than any member of the same Subgroup as such Subgroup
Member) for all periods before the Deconsolidation Date as to such Subgroup
Member, regardless of whether such periods occur before or after the Effective
Date, including any expenses incurred by such Subgroup Member (including
reasonable accountants' and attorneys' fees) in connection therewith. Unclaimed
property and escheat taxes shall be borne by the Subgroup Member whose
operations give rise to the liability therefor.
19
<PAGE>
H. Administrative Provisions.
--------------------------
1. Cooperation and Exchange of Information. TCI and each Subgroup
----------------------------------------
Member will provide each other with such cooperation and information as either
of them may reasonably request of the other in filing any Tax Return, amended
return or claim for refund, determining a liability for Taxes or a right to
refund of Taxes, in conducting any audit or other proceeding in respect of Taxes
or in preparing any financial statement information concerning or relating to
Taxes, including any accrual of Taxes required for financial statement purposes.
Such cooperation shall include providing copies of all relevant Tax Returns,
together with all accompanying schedules and related workpapers, computerized
tax database, documents relating to rulings or other determinations by taxing
authorities, and records concerning the ownership and tax basis of property,
which any party hereto may possess. Each party shall make its employees
available to any other party hereto on a mutually convenient basis to provide
explanations of any documents or information requested hereunder. Except as
otherwise provided in the Agreement, any party requesting assistance hereunder
shall reimburse any party providing such assistance for any reasonable out-of-
pocket costs incurred in providing any Tax Return, document or other written
information, upon receipt of reasonable documentation of such costs. Each party
hereto will retain all returns, schedules and workpapers, and all material
records or other documents relating thereto, until the expiration of the statute
of limitations (including extensions) for the taxable years to which such
returns and other documents relate and, unless such Tax Returns and other
documents are offered to the other parties hereto, until the final determination
of any payments which may be required in respect of such years under this
Agreement. Any information obtained under this Section shall be kept
confidential,
20
<PAGE>
except as may be otherwise necessary in connection with the filing of returns or
claims for refund or in conducting any audit or other proceeding.
2. Meaning of Receipt or Reduction. Any reference in this Agreement
--------------------------------
to the receipt by a party of an amount, or a reduction in a tax liability of a
party or interest with respect thereto shall (except where the context indicates
to the contrary) include any offset or credit against any other tax liability of
such party, and shall be deemed to have been received or refunded at the time
such other tax liability (or interest thereon) would otherwise have been due.
3. Character and Effect of Payments. All amounts paid pursuant to
---------------------------------
this Agreement by one party to another, including all payments in discharge of
an outstanding balance in an Intercompany Account, shall be treated by the
parties for all Tax purposes as non-taxable recoveries of capital in the nature
of intercompany settlements of liabilities existing on or before the
Deconsolidation Date, other than Post-Deconsolidation Correlative Amounts. With
respect to Post-Deconsolidation Correlative Amounts or if, notwithstanding such
treatment by the parties, as a result of a Final Determination the federal,
state, local or foreign income tax liability of any party hereto shall be
increased as a result of its receipt of a payment pursuant to this Agreement,
such payment shall be appropriately adjusted so that the amount of such payment,
as adjusted, reduced by the amount of all income taxes payable with respect to
the receipt thereof (but taking into account all correlative tax benefits
resulting from the payment of such income taxes), shall equal the amount of the
payment which the party receiving such payment would otherwise be entitled to
receive pursuant to this Agreement.
4. Entire Agreement; Termination of Prior Agreements. This Agreement
--------------------------------------------------
constitutes the entire agreement among the parties concerning the subject matter
hereof and
21
<PAGE>
supersedes all other agreements, whether or not written, in respect of any Tax
between or among any of the Subgroup Members and TCI. All such agreements are
hereby cancelled (to the extent not incorporated herein) and any rights or
obligations existing thereunder are hereby fully and finally settled without any
payment by any party thereto. This Agreement may not be amended except by an
agreement in writing, signed by the parties hereto.
5. Effective Date. This Agreement is effective as of the Effective
---------------
Date. The parties stipulate that the Intercompany Accounts had zero balances as
of the Effective Date; however, certain other intercompany account balances
remain outstanding as between TCI, TCIC and TCICI. In addition, the parties
acknowledge that, as of the Effective Date but subject to Section F, no credits
or charges to the Intercompany Accounts are necessary to account for tax
benefits or tax liabilities for any periods through and including the second
calendar quarter of 1995. This Agreement shall continue in effect until
otherwise agreed in writing by TCI and the Subgroup Parents.
6. Notices. All notices, requests, demands and other communications
--------
to any party hereunder shall be in writing and shall be duly given if delivered
and mailed (registered or certified mail, postage prepaid, return receipt
requested) to the address set forth below or such other address as any party
shall give written notice to the other:
If to TCI:
Tele-Communications, Inc.
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Attention: Colin Stoner
22
<PAGE>
If to a member of the Liberty Subgroup:
Liberty Media Corporation
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Attention: Robert Bennett
If to a member of the International Subgroup:
Tele-Communications International, Inc.
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Attention: Graham Hollis
If to a member of the TCIC Subgroup:
TCI Communications, Inc.
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Attention: Bernard Schotters
If to a member of the TCICI Subgroup:
TCI Cable Investments, Inc.
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Attention: Bernard Schotters
23
<PAGE>
If to a member of the Technology Subgroup:
TCI Technology Ventures, Inc.
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Attention: David Boileau
7. Resolution of Disputes. Any disputes between any parties hereto
-----------------------
concerning the calculation of amounts, allocation or attribution of costs or of
any Tax or Tax Item or similar accounting matters shall be resolved by a
nationally recognized public accounting firm selected by the parties involved in
such dispute, whose fees and expenses shall be shared by such parties.
8. Application to Present and Future Subsidiaries. This Agreement is
-----------------------------------------------
being entered into by TCI, Liberty, International, Technology, TCIC and TCICI on
behalf of themselves and each of their respective subsidiaries. This Agreement
shall constitute a direct obligation of each Subgroup Member and of each member
of the TCI Group that is not a Subgroup Member, and shall be deemed to have been
adopted and affirmed on behalf of any corporation which becomes a Subgroup
Member or a member of the TCI Group other than a Subgroup Member. This
Agreement shall be binding upon, and shall inure to the benefit of, the
successors, assigns and persons controlling any of the corporations bound
hereby.
9. Comprehensive Settlement. Following the expiration of the statute
-------------------------
of limitations for all taxable years ending before the Deconsolidation Date, and
for the taxable year which includes the Deconsolidation Date, of a Subgroup
Parent which ceases to be a member of the TCI Group and each member of the TCI
Group that is not a member of such Subgroup Parent's Subgroup, under every
federal, state, local, or foreign Tax law under which such corporation may
24
<PAGE>
have a material liability for such years, the parties hereto shall each, if
requested by one of the others, agree to negotiate in good faith in an effort to
reach an appropriate settlement of all of the then remaining obligations of such
Subgroup Parent and its Subsidiaries under this Agreement.
10. Governing Law. This Agreement shall be governed by the laws of
--------------
the State of Delaware without regard to the principles of conflicts of laws
thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
TELE-COMMUNICATIONS, INC.
By: /s/ Stephen M. Brett
----------------------------------
LIBERTY MEDIA CORPORATION
By: /s/ Peter Barton
----------------------------------
TELE-COMMUNICATIONS INTERNATIONAL, INC.
By: /s/ Graham Hollis
----------------------------------
TCI COMMUNICATIONS, INC.
By: /s/ Barney Schotters
----------------------------------
TCI CABLE INVESTMENTS, INC.
By: /s/ Barney Schotters
----------------------------------
TCI TECHNOLOGY VENTURES, INC.
By: /s/ David Boileau
----------------------------------
25
<PAGE>
EXHIBIT 2.5.1
FIRST AMENDMENT TO
TAX SHARING AGREEMENT
This First Amendment to Tax Sharing Agreement dated as of October 1995
by and among Tele-Communications, Inc., a Delaware corporation ("TCI"), Liberty
Media Corporation, a Delaware corporation ("Liberty"), Tele-Communications
International, Inc. ("International"), TCI Technology Ventures, Inc.
("Technology"), TCI Communications, Inc. ("TCIC"), TCI Cable Investments, Inc.
("TCICI"), TCI Starz, Inc. ("Starz") and TCI CT Holdings, Inc. ("CT"),
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, TCI, Liberty, International, Technology, TCIC and TCICI have
entered into a Tax Sharing Agreement (the "Agreement"); and
WHEREAS, the parties to the Agreement now wish to amend the Agreement
to reflect the addition of Starz and CT as partners and in certain other
respects;
NOW, THEREFORE, the parties hereby agree as follows:
1. The last sentence of the first paragraph is amended to read as
follows:
TCI is the common parent, and each member (a "Subgroup Member") of the
Liberty Subgroup, the International Subgroup, the Technology Subgroup, the
TCIC Subgroup, the TCICI Subgroup, the Starz Subgroup and the CT Subgroup
(each a "Subgroup") is a member, of an Affiliated Group (the "TCI Group")
which files a consolidated federal income tax return pursuant to Section
1501 of the Code. The term "Subgroup" shall also include each Subgroup
Parent and the Subsidiaries thereof that joins the TCI Group after the date
hereof.
2. Section A of the Agreement is amended by adding thereto the
following new definitions:
1
<PAGE>
"CT Subgroup" means CT and each corporation that is a Subsidiary of
CT.
"Starz Subgroup" means Starz and each corporation that is a Subsidiary
of Starz.
3. The definition of "Federal Tax Benefit" is amended to read as
follows:
"Federal Tax Benefit," as to any Subgroup, shall mean the amount
determined with respect to such Subgroup under Section C.2. hereof, as
adjusted pursuant to any other provision hereof.
4. The definition of "Federal Tax Liability" is amended to read as
follows:
"Federal Tax Liability," as to any Subgroup, shall mean the amount
determined with respect to such Subgroup under Section C.1. hereof, as
adjusted pursuant to any other provision hereof.
5. The definition of "Subgroup Parent" is amended to read as
follows:
"Subgroup Parent" means each of Liberty, International, Technology,
TCIC, TCICI, Starz, CT and any direct wholly-owned subsidiary of TCI formed
or acquired after the date hereof.
6. The definition of "Tax Benefit" is amended to read as follows:
"Tax Benefit" means, as to any Subgroup, a Federal Tax Benefit of such
Subgroup.
7. The definition of "Tax Liability" is amended to read as follows:
"Tax Liability" means as to any Subgroup, a Federal Tax Liability or
State or Local Tax Liability of such Subgroup.
8. Section B.2. of the Agreement is amended by adding a new
subsection c. at the end thereof to read as follows:
c. In the event that any Subgroup Member is entitled to claim in any
taxable period any net operating loss or other tax benefit attributable to
a prior taxable period ending, and if such net operating loss or other tax
benefit was used by such Subgroup to reduce its Tax Liability or increase
its Tax Benefit for such prior taxable period, then such Subgroup Member
shall (i) take such steps as may be reasonably necessary to claim such net
operating loss or other tax benefit and (ii) promptly upon receipt by such
Subgroup Member (or another member of the Affiliated Group of which such
Subgroup
2
<PAGE>
Member is a member) of a refund of or reduction in tax liability, such
Subgroup Member shall remit such amount to TCI (or, if such amount is
received prior to the Deconsolidation Date, the Intercompany Account of
such Subgroup Member's Parent shall be appropriately adjusted).
9. Section C of the Agreement is hereby amended to read as follows:
C. Federal Income Taxes.
---------------------
1. Federal Tax Liability. For each taxable year or part thereof
---------------------
ending after the Effective Date that a Subgroup is included in the TCI
Group, the Federal Tax Liability of such Subgroup shall be equal to the sum
of:
a. The amount by which (i) the product of (x) the amount of
taxable income attributable to such Subgroup for such period calculated, in
accordance with Treasury Regulations section 1.1552-1(a)(1)(ii), as though
such Subgroup were required to file a consolidated corporate federal income
tax return pursuant to the Code (with the timing of the recognition of
income, gain, deduction and loss and other items determined by reference to
the timing of such items for purposes of the preparation of the
consolidated return of the TCI Group except that current year items of loss
and deduction shall be considered regardless of whether or not such items
are utilized by the TCI Group) for such period multiplied by (y) the
maximum corporate federal income tax rate in effect for such taxable year
or part thereof exceeds (ii) the amount of tax credits attributable to such
Subgroup (whether attributable to such taxable year or part thereof or
carried to such taxable year or part thereof from another taxable year)
that are actually utilized by the TCI Group to reduce its consolidated
federal income tax liability for such period; plus
b. The product of (x) the amount of modified alternative minimum
taxable income, within the meaning of Section 59A(b) of the Code,
attributable to such Subgroup for such period calculated, in accordance
with Treasury Regulations section 1.1552-1(a)(1)(ii), as though such
Subgroup were required to file a consolidated corporate federal income tax
return for such period multiplied by (y) the statutory rate set forth in
Section 59A(a) of the Code.
2. Federal Tax Benefit. For each taxable year or part thereof ending
--------------------
after the Effective Date that a Subgroup is included in the TCI Group, the
Federal Tax Benefit of such Subgroup shall be equal to the sum of:
a. The product of (i) the amount of taxable loss attributable to
such Subgroup (whether attributable to such taxable year or part thereof or
carried to such taxable year or part thereof from another taxable year) and
actually used by the TCI Group during such taxable year or part thereof to
reduce its consolidated federal income
3
<PAGE>
tax liability, calculated in accordance with Treasury Regulations section
1.1552-1(a)(1)(ii) (without regard to the last sentence thereof), as though
such Subgroup were required to file a consolidated corporate federal income
tax return pursuant to the Code (with the timing of the recognition of
income, gain, deduction and loss and other items determined by reference to
the timing of such items for purposes of the preparation of the
consolidated return of the TCI Group) for such period, multiplied by (ii)
the maximum corporate federal income tax rate in effect during such taxable
year or part thereof; plus
b. The product of (x) the amount by which zero exceeds the
alternative minimum taxable income, within the meaning of Section 56(d) of
the Code, attributable to such Subgroup for such period and used by the TCI
Group to reduce its consolidated modified alternative taxable income
(within the meaning of Section 59A(b) of the Code), such alternative
minimum taxable income to be calculated, in accordance with Treasury
Regulations section 1.1552-1(a)(1)(ii) (without regard to the last sentence
thereof), as though such Subgroup were required to file a consolidated
corporate federal income tax return for such period, multiplied by (y) the
statutory rate set forth in Section 59A(a) of the Code.
3. Alternative Minimum Tax and AMT Credit. For each taxable year or
---------------------------------------
portion thereof that a Subgroup is included in the TCI Group, the Federal
Tax Liability and Federal Tax Benefit of such Subgroup shall be computed
without regard to the Alternative Minimum Tax and the AMT Credit, and the
Alternative Minimum Tax shall be paid by, and any tax benefit attributable
to the AMT Credit shall be reserved to, TCI.
4. Time of Determination: Credits and Charges to the Intercompany
--------------------------------------------------------------
Accounts. The estimated Federal Tax Benefit and Federal Tax Liability of
---------
each Subgroup shall be calculated by TCI as promptly as practicable after
the close of each calendar quarter in each taxable year, and the
appropriate credits or charges made to the Intercompany Accounts. As soon
as practicable after the close of each taxable year, TCI shall determine
the final Federal Tax Benefit or final Federal Tax Liability of such
Subgroup for such taxable year and shall:
a. credit the Intercompany Account of the Subgroup Parent of
such Subgroup with the amount by which:
(1) such final Federal Tax Benefit for such taxable year exceeds
the aggregate credits for estimated Federal Tax Benefits made to such
Intercompany Account with respect to such Subgroup for such taxable year,
or
(2) the aggregate charges for estimated Federal Tax Liability
made to such Intercompany Account with respect to such Subgroup for such
taxable year exceed such final Federal Tax Liability for such taxable year;
and
4
<PAGE>
b. charge the Intercompany Account of the Subgroup Parent of
such Subgroup with the amount by which:
(1) the aggregate credits for estimated Federal Tax Benefits made
to such Intercompany Account with respect to such Subgroup for such taxable
year exceed such final Federal Tax Benefit for such taxable year; or
(2) such final Federal Tax Liability for such taxable year
exceeds the aggregate charges for estimated Federal Tax Liability made to
such Intercompany Account with respect to such Subgroup for such taxable
year.
For purposes of this Section C.4., for the first two calendar quarters of
1995, the Intercompany Account of such Subgroup Parent shall be deemed to
have been credited or charged, as the case may be, with the estimated
Federal Tax Benefit or Federal Tax Liability for which such Subgroup
Parent's Subgroup was credited or charged with respect to such calendar
quarters in connection with the preparation of the financial statements of
such Subgroup for such calendar quarters.
5. Filings and Procedural Matters.
-------------------------------
a. TCI shall continue to prepare and file all federal income Tax
Returns (the "TCI Consolidated Returns") which are required to be filed by
the TCI Group for all periods and will pay all Taxes shown as due thereon.
The costs of such preparation and filing shall be allocated among and paid
by the Subgroup Parents in accordance with TCI's policy of allocating
corporate general and administrative costs among the Subgroups. Such
returns shall include all Tax Items of the Subgroup Members for all tax
periods or portions thereof ending on or before the Deconsolidation Date
with respect to such Subgroup Members. TCI will make all decisions
relating to the preparation and filing of such returns. Each Subgroup
Member whose Tax Items are includable in any such return shall, upon the
request of TCI, consent to be included in the TCI Consolidated Return on
any form as may be prescribed for such consent.
b. So as to enable TCI to prepare accurately and completely the
TCI Consolidated Returns and in order to provide for accurate financial
reporting, for tax periods or portions thereof ending on or before the
Deconsolidation Date as to any Subgroup Parent, such Subgroup Parent shall
provide such information with respect to Taxes (including forecasts,
projections and tax accruals) as TCI may reasonably request. Each Subgroup
Parent shall bear all costs and expenses of preparation and submission of
such information, including accountants' and attorneys' fees.
c. TCI may claim the benefit for federal income tax purposes of
any net operating loss or other tax benefit carryback resulting from a loss
or tax benefit incurred by any Subgroup for any taxable period after the
Deconsolidation Date of such
5
<PAGE>
Subgroup, provided that TCI pays to such Subgroup the amount of any refund
of Taxes resulting from such net operating loss or other tax benefit
carryback, together with the interest received in respect of such refund,
promptly after receipt thereof from the IRS. However, with respect to any
such net operating loss or other tax benefit that is attributable to a
taxable period of a Subgroup after the Deconsolidation Date with respect to
such Subgroup and as to which such Subgroup has the option to waive its
right to carry such net operating loss or other tax benefit back, such
Subgroup shall exercise such option and elect to carry such net operating
loss or other tax benefit forward unless either (x) TCI requests such
Subgroup not to exercise such option and instead to carry such net
operating loss back to a period prior to the Deconsolidation Date with
respect to such Subgroup or (y) TCI consents in writing to the failure of
such Subgroup to exercise any such option to waive such carryback period.
If such Subgroup fails to exercise any such option to waive the right to
carry back any such net operating loss or other tax benefit without such a
request or consent from TCI, TCI shall not be obligated to compensate such
Subgroup for any benefit that TCI may receive from such net operating loss
or other tax benefit.
d. In the event that, after the Deconsolidation Date as to any
Subgroup, such Subgroup receives any benefit from an AMT Credit
attributable to any period ending on or before such Deconsolidation Date
(by way of reduction in federal income tax liability or otherwise), such
Subgroup shall promptly pay to TCI the amount of such benefit plus any
associated interest thereon. Notwithstanding anything to the contrary
herein, the provisions of this Section C.5.d. shall survive the termination
of this Agreement.
10. The second sentence of Section H.8. is amended to read as follows:
This Agreement shall constitute a direct obligation of each Subgroup
Parent and Subgroup Member and of each member of the TCI Group that is not
a Subgroup Parent or a Subgroup Member, and shall be deemed to have been
adopted and affirmed on behalf of any corporation which becomes a Subgroup
Parent or a Subgroup Member or a member of the TCI Group other than a
Subgroup Parent or a Subgroup Member.
11. The last sentence of the Agreement is amended to read as follows:
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the Effective Date.
12. Except as otherwise expressly provided herein, the Agreement shall
continue in full force and effect without modification.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment effective
as of the Effective Date (as defined in the Agreement).
TELE-COMMUNICATIONS, INC.
By: /s/ Stephen M. Brett
-----------------------------------------
LIBERTY MEDIA CORPORATION
By: /s/ Robert R. Bennett
-----------------------------------------
TELE-COMMUNICATIONS INTERNATIONAL, INC.
By: /s/ Graham Hollis
-----------------------------------------
TCI COMMUNICATIONS, INC.
By: /s/ Barney Schotters
-----------------------------------------
TCI CABLE INVESTMENTS, INC.
By: /s/ Barney Schotters
-----------------------------------------
TCI TECHNOLOGY VENTURES, INC.
By: /s/ David Boileau
-----------------------------------------
TCI STARZ, INC.
By: /s/ Stephen M. Brett
-----------------------------------------
TCI CT HOLDINGS, INC.
By: /s/ Stephen M. Brett
-----------------------------------------
7
<PAGE>
EXHIBIT 2.5.2
[FORM OF]
SECOND AMENDMENT TO
TAX SHARING AGREEMENT
This Second Amendment to the Tax Sharing Agreement dated as of October __,
1996, by and among Tele-Communications, Inc., a Delaware corporation ("TCI"),
Liberty Media Corporation, a Delaware corporation ("Liberty"), Tele-
Communications International, Inc. ("International"), TCI Technology Ventures,
Inc. ("Technology"), TCI Communications, Inc. ("TCIC"), TCI Cable Investments,
Inc. ("TCICI"), TCI Starz, Inc. ("Starz") and TCI CT Holdings, Inc. ("CT").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the parties have entered into a Tax Sharing Agreement (the
"Agreement") effective July 1, 1995, as amended by the First Amendment to Tax
Sharing Agreement, dated as of October 1995; and
WHEREAS, the parties now wish to amend the Agreement to provide for the
treatment of indirect subsidiaries of TCI that become direct, first-tier
subsidiaries of TCI;
NOW, THEREFORE, the parties hereby agree as follows:
1. Section A of the Agreement is amended by adding thereto the following
new definitions:
"CT" means TCI CT Holdings, Inc.
--
"First-Tier Subsidiary" means any subsidiary of TCI that would qualify
---------------------
as a member of the TCI Group based solely on the stock of such subsidiary
owned directly by TCI.
"Membership Date" means, for any member of the TCI Group, the date
---------------
that such entity became, and since which has continuously remained, a
member of the TCI Group.
"Starz" means TCI Starz, Inc.
-----
2. The definition of "Subgroup Parent" is amended to read as follows:
"Subgroup Parent" means each of Liberty, International, Technology,
---------------
TCIC, TCICI, Starz, CT and any other First-Tier Subsidiary formed or
acquired after the date hereof.
<PAGE>
3. Section H.6. of the Agreement is amended by adding thereto the
following at the end thereof:
"If to a member of the Subgroup of any other Subgroup Parent, to such
Subgroup Parent at its address as shown in the books and records of TCI."
4. The Agreement is amended by adding thereto a new Section I, as
follows:
"I. Promotion of Subsidiaries.
-------------------------
1. Raised Subsidiaries. Anything contained herein to the contrary
-------------------
notwithstanding, if any Subgroup Member (a "Raised Subsidiary") becomes a
First-Tier Subsidiary (as a result of any spin-off, dividend, distribution,
liquidation, merger, transfer or other transaction, or any series of any
such transactions, whether or not related), other than in connection with
any transaction or series of related transactions in which such Subgroup
Member subsequently ceases to be a First-Tier Subsidiary but remains a
member of the TCI Group, then from and after the time (the "Promotion
Time") that such Raised Subsidiary so becomes a First-Tier Subsidiary:
a. such Raised Subsidiary shall be deemed to have been a
Subgroup Parent (and such Raised Subsidiary and its Subsidiaries at
the Promotion Time shall be deemed not to have been Subsidiaries of
any other Subgroup), for all purposes of this Agreement, from the
later of (i) the Effective Date, and (ii) the Membership Date with
respect to such Raised Subsidiary (and for purposes of Section C.4. of
this Agreement, from the later of (i) January 1, 1995, and (ii) such
Membership Date);
b. TCI shall establish and maintain an Intercompany Account
between it and such Raised Subsidiary, which shall be credited with
any Tax Benefits and charged with any Tax Liabilities attributable to
the Subgroup of such Raised Subsidiary or any Subgroup Member thereof,
as provided in Section B.1. of this Agreement, determined on a
retroactive basis from the Effective Date; and
c. the Intercompany Account of each Subgroup of which the Raised
Subsidiary or any of its Subsidiaries at the Promotion Time was a
member, at any time prior to the Promotion Time, shall be
appropriately adjusted to reflect the effect of clause a. of this
Section I.1. on a retroactive basis from the Effective Date.
2. General Rule. Except as otherwise expressly provided in Section
------------
I.1. of this Agreement, the provisions of this Agreement shall apply to any
Raised Subsidiary with the same effect as to any other Subgroup Parent.
2
<PAGE>
3. Execution. For the avoidance of doubt, each Raised Subsidiary
---------
shall automatically become a party to this Agreement, effective as of the
Promotion Time relating thereto, and shall execute and deliver a
counterpart of this Agreement to evidence the same, as soon as practicable
following such Promotion Time."
5. Except as otherwise expressly provided herein, the Agreement shall
continue in full force and effect without modification.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment effective as
of the Effective Date (as defined in the Agreement).
TELE-COMMUNICATIONS, INC. TCI TECHNOLOGY VENTURES, INC.
By___________________________ By____________________________
LIBERTY MEDIA CORPORATION TCI STARZ, INC.
By___________________________ By____________________________
TELE-COMMUNICATIONS INTERNATIONAL, INC. TCI CT HOLDINGS, INC.
By___________________________ By____________________________
TCI COMMUNICATIONS, INC.
By___________________________
TCI CABLE INVESTMENTS, INC.
By____________________________
4
<PAGE>
Exhibit 2.6
FORM OF
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is dated as of November __, 1996 and is between
TCI COMMUNICATIONS, INC., a Delaware corporation ("TCIC"), and TCI SATELLITE
ENTERTAINMENT, INC., a Delaware corporation ("Satellite Company").
RECITALS:
- --------
A. Satellite Company was formed on June 21, 1996 for the purpose of
owning and operating certain digital satellite businesses of Tele-
Communications, Inc., a Delaware corporation ("TCI"). Satellite Company is a
wholly owned indirect subsidiary of TCI. TCIC is a majority owned direct
subsidiary of TCI.
B. TCI plans to distribute as a dividend all of the issued and
outstanding common stock of Satellite Company (the "Distribution") to the
holders of Tele-Communications, Inc. Series A TCI Group Common Stock, $1.00 par
value per share (the "Series A Common Stock"), and Tele-Communications, Inc.
Series B TCI Group Common Stock, $1.00 par value per share (the "Series B Common
Stock"). As a result of the Distribution, Satellite Company will cease to be a
wholly owned subsidiary of TCI.
C. TCIC has made intercompany loans to Satellite Company on the dates
and in the principal amounts set forth on Exhibit A hereto (the "Initial
Loans"). TCIC and Satellite Company desire to refinance $250,000,000 of the
Initial Loans (the "Term Loan"), as provided in the Reorganization Agreement
(defined below). Pursuant to the Reorganization Agreement, the remaining
balances owed by Satellite Company to TCIC will be assumed by TCI and TCI will
issue a promissory note to TCIC in the amount of the remaining balances.
D. In order to provide Satellite Company with a source of financing
after the Distribution, Satellite Company has requested that TCIC establish a
revolving credit facility pursuant to which Satellite Company may obtain loans
in an aggregate principal amount outstanding at any one time not exceeding
$500,000,000 (the "Revolving Loans").
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
<PAGE>
Exhibit 2.6
ARTICLE I.
CERTAIN DEFINITIONS
"Annual Interest Expense" shall mean, for the 12 month period prior
to the date of determination, the sum of (i) the amount of all interest on
Funded Debt of the Satellite Company and its Subsidiaries on a consolidated
basis which, without duplication, was paid or scheduled to be paid or accrued
during such period, including, without limitation, in respect of the Loans and
(ii) all commitment or line of credit fees (no matter how designated) paid or
scheduled or required to be paid by Satellite Company and its Subsidiaries to
any lender in exchange for such lender's commitment to lend to Satellite Company
and its Subsidiaries, including, without limitation, the Commitment Fee in
respect of the Revolving Loans.
"Annual Pro-Forma Interest Expense" shall mean, as of any date of
determination, Pro-Forma Interest Expense for the four complete fiscal quarters
immediately succeeding such date of determination.
"Annualized Cash Flow" shall mean, as of any date of determination,
(a) Cash Flow of the Satellite Company and its Subsidiaries for the fiscal
quarter ending on such date of determination multiplied by (b) four (4), less
tax expense (net of deferred taxes), excluding all capital gains taxes resulting
from the sale or other disposition of assets, of Satellite Company and its
Subsidiaries for the period of four fiscal quarters ending on such date of
determination.
"Basic Subscriber" shall mean (a) each dwelling unit, including a
separate apartment within an apartment building, in respect of which Satellite
Company and its Subsidiaries are paid the full monthly price for their basic
satellite services in accordance with standard basic rates generally charged by
Satellite Company and its Subsidiaries in respect of such satellite system, none
of which is more than sixty (60) days delinquent in its payment of basic service
and (b) each Equivalent Subscriber.
"Business Day" shall mean any day (other than a Saturday, Sunday or
legal holiday in the State of Colorado or the State of New York) on which banks
are open for business in New York, New York and Denver, Colorado.
"Cash Flow" for Satellite Company and its Subsidiaries shall mean, for
the period stated, Operating Income of Satellite Company and its Subsidiaries
for such period, plus the sum of depreciation, amortization, and other non-cash
charges (in each case to the extent deducted in determining such Operating
Income) for such period (or less such amounts to the extent that deferred
management fees or other non-cash charges become a non-cash contribution to such
Operating Income); excluding all extraordinary or non-recurring items and
calculated after giving effect to acquisitions, exchanges and dispositions of
assets of Satellite Company and its Subsidiaries during such period as if such
transactions had occurred on the first day of such period.
"Closing Date" shall mean the date on which the Distribution is made
to holders
2
<PAGE>
Exhibit 2.6
of Series A Common Stock and Series B Common Stock.
"Commitment Fee" shall have the meaning set forth in section 2.05.
"Default" shall mean an event that with the giving of notice or the
passage of time (or both) would constitute an Event of Default.
"Distribution" shall have the meaning set forth in the recitals.
"Equivalent Subscribers" shall mean all subscribers deemed to make up
bulk subscribers (such as hotels and apartment buildings) of bulk basic
subscription services offered in a satellite system, where the number of
Equivalent Subscribers with respect to a bulk subscriber in such satellite
system is deemed to consist of the number obtained by dividing the monthly
revenues for such bulk subscriber by the average monthly basic subscription
price for individual subscribers in such satellite system. "Equivalent
Subscriber" shall mean each subscriber deemed to make up a bulk subscriber.
"Event of Default or Events of Default" shall have the meanings set
forth in Article VI.
"Fulfillment Agreement" shall mean the agreement to be entered into as
of the Closing Date, as such agreement may be amended from time to time,
pursuant to which TCIC will provide certain customer fulfillment services to
Satellite Company for the charges set forth in such agreement.
"Funded Debt" of any Person or group of Persons shall mean all
Indebtedness, determined on a consolidated basis, excluding Indebtedness
constituting intercompany subordinated debt.
"Indebtedness" shall mean, with respect to any Person, without
duplication: (i) all obligations of such Person for borrowed money, (ii) all
obligations of such Person evidenced by bonds, notes, debentures or similar
instruments, (iii) all obligations of such Person upon which interest charges
are customarily paid, (iv) all obligations of such Person issued or assumed as
the deferred purchase price of property or services (other than accounts payable
to suppliers incurred in the ordinary course of business), and (v) all
obligations of such Person in respect of letters of credit and bankers
acceptances. The term "Indebtedness" shall not include the obligation of any
Person guaranteeing the Indebtedness of any other Person.
3
<PAGE>
Exhibit 2.6
"Indemnification Agreements" shall mean the indemnification
agreements, to be entered into as of the Closing Date, as such agreements may be
amended from time to time, pursuant to which Satellite Company will indemnify
TCI and/or certain of its subsidiaries against any cost or expense that TCI
and/or such subsidiaries may incur by reason of certain guarantees and other
contracts to which TCI is a party but which are for the benefit of Satellite
Company.
"Leverage Ratio" shall mean, as of any date of calculation, the ratio
of Funded Debt of Satellite Company and its Subsidiaries to Annualized Cash Flow
as of such date.
"Loans" shall mean the Revolving Loans and the Term Loan.
"Maturity Date" shall mean September 30, 2001.
"Maximum Rate" shall have the meaning set forth in section 2.02(d).
"Note or Notes" shall mean the promissory note or notes executed
pursuant to the Term Loan or the Revolving Loans by Satellite Company as maker
in favor of TCIC and in substantially the form of Exhibit B-1 (with respect to
the Term Loan) and Exhibit B-2 (with respect to the Revolving Loans).
"Operating Income" shall mean operating income as determined in
accordance with generally accepted accounting principles and in a manner
consistent with the calculation of operating income as set forth in Satellite
Company's consolidated audited financial statements less, to the extent not
deducted in connection with determination thereof, all management fees.
"Person" shall mean any natural person, corporation, limited liability
company, partnership, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental authority or any other entity, whether
acting in an individual, fiduciary or other capacity.
"Prepayment Notice" shall have the meaning set forth in Section
2.03(b).
"Pro-Forma Debt Service" shall mean, in respect of Satellite Company
and its Subsidiaries, the sum of all Annual Pro-Forma Interest Expense and
scheduled principal payments, including the current maturities thereof, due on
Funded Debt for the four complete fiscal quarters immediately succeeding the
date of any determination thereof, but excluding, without duplication, Annual
Pro-Forma Interest Expense and scheduled principal payments, in
4
<PAGE>
Exhibit 2.6
each case payable on short-term Funded Debt (including the current portion of
long-term Funded Debt) that could be refinanced on the date of determination by
Funded Debt under a committed credit facility under which there are sufficient
unused commitments on such date of determination and as to which the conditions
precedent to funding can be satisfied on such date of determination ("Substitute
Long Term Funded Debt"), provided that the applicable scheduled payments of
principal and interest with respect to such Substitute Long-Term Funded Debt are
included in the calculation of Pro-Forma Debt Service.
"Pro-Forma Interest Expense" shall mean, for any period for which a
determination thereof is to be made, the sum of (i) the amount of all interest
on Funded Debt of the Satellite Company and its Subsidiaries on a consolidated
basis which, without duplication, is scheduled to be paid or will accrue during
such period, including, without limitation, in respect of the Loans and (ii) all
commitment or line of credit fees (no matter how designated) scheduled or
required to be paid by Satellite Company and its Subsidiaries to any lender in
exchange for such lender's commitment to lend to Satellite Company and its
Subsidiaries, including, without limitation, the Commitment Fee in respect of
the Revolving Loans, which is scheduled or required to be paid by Satellite
Company and its Subsidiaries during such period. For purposes of calculating
Pro-Forma Interest Expense (i) where any item of interest on any Funded Debt
varies or depends upon a variable rate of interest, such rate shall be assumed
to equal the rate in effect on the date of calculation thereof and (ii) the
principal amount outstanding under any revolving or line of credit facility
shall be assumed to be the outstanding principal balance thereunder on the last
day of the fiscal quarter immediately preceding the period in respect of which
the calculation of Pro-Forma Interest Expense is being determined.
"Reorganization Agreement" shall mean the reorganization agreement
entered into by TCI, TCIC, Satellite Company and other TCI subsidiaries on or
before the Closing Date.
"Revolving Loan Commitment" shall mean $500,000,000 principal amount,
as such amount may be adjusted from time to time pursuant to Section 2.04.
"Revolving Loan Commitment Termination Date" shall mean the date on
which the commitment of TCIC to make Revolving Loans under this Agreement shall
terminate in
5
<PAGE>
Exhibit 2.6
accordance with Section 2.04.
"Revolving Loans" shall have the meaning set forth in the recitals.
"Satellite Company" shall have the meaning set forth in the recitals.
"Series A Common Stock" shall have the meaning set forth in the
recitals.
"Series B Common Stock" shall have the meaning set forth in the
recitals.
"Subsidiary" shall mean (with respect to any Person) any corporation,
limited liability company, partnership or joint venture, whether now existing or
hereafter organized or acquired in which: (i) (in the case of a corporation)
securities having a majority of the voting power in the election of directors
(excluding for these purposes securities that entitle the holder to vote only
upon the occurrence of a contingency) are at the time owned, directly or
indirectly, by such Person and/or one or more of its Subsidiaries, or (ii) (in
the case of a limited liability company, partnership or joint venture): (y) the
managing general partner is such Person or one or more of its Subsidiaries, or
(z) a majority of the ownership interests are owned, directly or indirectly, by
such Person or one or more of its Subsidiaries.
"TCI" shall have the meaning set forth in the recitals.
"TCIC" shall have the meaning set forth in the recitals.
"Term Loan" shall have the meaning set forth in the recitals.
"Transition Services Agreement" shall mean the agreement to be entered
into as of the Closing Date, as such agreement may be amended from time to time,
pursuant to which TCI will provide, among other things, certain services to
Satellite Company for the charges set forth in such agreement.
"Unused Portion of the Revolving Loan Commitment" shall mean, as of
any date, the Revolving Loan Commitment as of such date less the aggregate
unpaid principal amount of all Revolving Loans outstanding as of such date.
ARTICLE II.
THE LOANS
6
<PAGE>
Exhibit 2.6
SECTION 2.01 Revolving Loans and the Term Loan.
---------------------------------
(a) Upon the terms and subject to the conditions set forth in this
Agreement, TCIC agrees to originate the Revolving Loans on a revolving credit
basis to Satellite Company, from time to time, from the Closing Date until the
Revolving Loan Commitment Termination Date, at such time and in such amounts as
Satellite Company shall request, in an aggregate principal amount at any time
outstanding not in excess of the Revolving Loan Commitment. Upon the terms and
subject to the conditions set forth in this Agreement, Satellite Company may
borrow, repay and reborrow funds from TCIC.
(b) In order to effect a borrowing under the Revolving Loan
Commitment, Satellite Company shall give TCIC irrevocable written notice not
less than three Business Days before a requested borrowing. Such notice shall
in each case be signed by an authorized officer and shall refer to this
Agreement and specify: (i) the amount of the requested borrowing under this
Agreement, (ii) the date (which shall be a Business Day) on which Satellite
Company is to receive the proceeds of such borrowing, and (iii) that all
conditions to such borrowing set forth in Article IV of this Agreement have been
satisfied. Satellite Company shall be deemed to be making, as of the date of
the delivery of the borrowing notice, the representations and warranties
contained in Article III of this Agreement by the act of delivering such
borrowing notice to TCIC.
(c) The Revolving Loans made by TCIC shall be evidenced by the Notes
(which shall be in the form of Exhibit B-2) duly executed on behalf of Satellite
Company. TCIC shall endorse on the schedule attached to the Notes, or otherwise
record in its internal records, an appropriate notation evidencing the date and
amount of each Revolving Loan, each payment and prepayment of the principal
amount of any Revolving Loan and other information provided for on such
schedule; provided, however, that the failure of TCIC to make such a notation or
-------- -------
any error in such notation shall not affect the obligation of Satellite Company
to repay the Revolving Loans in accordance with the terms of this Agreement and
the Notes.
(d) The Term Loan shall be governed by the terms and conditions of
this Agreement and the promissory note which shall be executed on the Closing
Date in the form of Exhibit B-1. Interest shall accrue on the principal amount
of the Term Loan from the Closing Date.
SECTION 2.02 Interest on Loans.
-----------------
(a) Subject to Section 2.02(d) below, the principal amount of each
Loan
7
<PAGE>
Exhibit 2.6
shall bear interest at a rate per annum (computed on the basis of the
actual number of days elapsed over a year of 360 days) equal to 10%. Accrued
interest shall compound semi-annually until paid.
(b) Interest on each Loan shall be due and payable on the date the
principal amount of such Loan is prepaid, upon acceleration of such Loan, or
upon the Maturity Date.
(c) If Satellite Company shall default in the payment of the principal
of, or interest on any Loan, or on any other amount becoming due hereunder, by
scheduled maturity or acceleration, Satellite Company shall, on demand from time
to time from TCIC, pay interest, to the extent permitted by law, on such
defaulted amount up to the date of actual payment (after as well as before
judgment) at a rate per annum (computed on the basis of the actual number of
days elapsed over a year of 360 days) equal to the interest rate then in effect
pursuant to Section 2.02(a) above plus 2%.
(d) All agreements between Satellite Company and TCIC are expressly
limited so that in no contingency or event whatsoever shall the interest paid or
agreed to be paid to TCIC for the use, forbearance, or detention of the
indebtedness evidenced by the Notes exceed the maximum rate permissible under
applicable law (the "Maximum Rate"). If from any circumstance TCIC should ever
receive an amount which would represent interest in excess of the Maximum Rate,
such amount as would be excessive interest shall be applied to the reduction of
the principal amount owing under the Notes and not to the payment of interest.
In determining whether the interest paid or payable, under any contingency,
exceeds such Maximum Rate, Satellite Company and TCIC shall to the maximum
extent permitted by applicable law: (i) characterize any non-principal payment
as an expense, fee, or premium rather than as interest; (ii) exclude voluntary
prepayments and the effects thereof; (iii) amortize, prorate, allocate, and
spread the total amount of interest throughout the full term of the Notes so
that the actual rate of such interest does not exceed such Maximum Rate; or (iv)
allocate interest between portions of the debt evidenced hereby so that no
portion of such debt shall bear interest at a rate greater than such Maximum
Rate. For purposes of the Notes, the term "applicable law" shall mean that law
in effect from time to time and applicable to the credit transaction between
Satellite Company and TCIC which lawfully permits the charging and collection of
the highest permissible, lawful, non-usurious rate of interest on such
transaction and the Notes, including laws of the State of Colorado and, to the
extent controlling, laws of the United States of America.
SECTION 2.03 Payment; Maturity; Prepayment; Indemnity.
----------------------------------------
(a) Unless accelerated hereunder, the principal amount of each Loan,
8
<PAGE>
Exhibit 2.6
together with all interest accrued thereon, shall be due and payable on the
Maturity Date.
(b) Satellite Company shall have the right, at any time and from time
to time, to prepay any Loan, in whole or in part, without premium or penalty,
upon giving written notice (a "Prepayment Notice") to TCIC at least three
Business Days prior to such prepayment. Each Prepayment Notice shall specify
the principal amount of each Loan (or portion thereof) to be prepaid and the
date of prepayment and shall commit Satellite Company to prepay such borrowing
on the date specified therein. All prepayments shall be accompanied by accrued
interest on the principal amount being prepaid to the date of prepayment.
(c) Upon the closing of any equity or debt financing by Satellite
Company, the Term Loan and the Revolving Loans will be immediately due and
payable in the amount of the proceeds raised by such equity financing or the
borrowings available under the commitments obtained in connection with such debt
financing. Satellite Company shall give three Business Days notice of the
closing date of such equity or debt financing and shall deliver the Prepayment
Notice referred to in section 2.03(b) above. Any such prepayment under this
section 2.03(c) shall be applied first to any amounts outstanding under the Term
Loan and then shall be applied towards amounts outstanding under the Revolving
Loans. Any prepayments under this section 2.03(c) may not be reborrowed, and
pursuant to section 2.04(a), will effect a reduction in the Revolving Loan
Commitment.
SECTION 2.04 Reduction and Termination of Revolving Loan Commitment.
------------------------------------------------------
(a) Any prepayments on the Revolving Loans under section 2.03(c) shall
immediately and irrevocably reduce the Revolving Loan Commitment by the
principal amount so prepaid.
(b) Upon at least three Business Days prior irrevocable written notice
to TCIC, Satellite Company may at any time in whole or, from time to time, in
part permanently reduce the amount of the Revolving Loan Commitment.
(c) The Revolving Loan Commitment shall terminate on the earlier to
occur of: (i) the Maturity Date, (ii) prepayment under section 2.04(a), or (iii)
an Event of Default.
SECTION 2.05 Facility Fees. As additional compensation to TCIC in
-------------
connection with this Agreement and the Revolving Loans, Satellite Company shall
pay to TCIC a commitment fee (the "Commitment Fee") equal to .375% per annum on
the average daily Unused Portion of the Revolving Loan Commitment, for the
period commencing on the Closing Date through and including the Revolving Loan
Commitment Termination Date. The
9
<PAGE>
Exhibit 2.6
Commitment Fee shall be computed on the basis of a 360-day year for actual days
elapsed and shall be payable annually, in arrears, on each anniversary of the
Closing Date, and on the Revolving Loan Commitment Termination Date.
SECTION 2.06 No Security. The Loans made by TCIC under this
-----------
Agreement shall be unsecured.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 Mutual Representations and Warranties. As an inducement
-------------------------------------
to enter into this Agreement, each party represents to and agrees with the other
that:
(a) it is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite corporate
power to own, lease and operate its properties, to carry on its business as
presently conducted and to carry out the transactions contemplated by this
Agreement.
(b) it has duly and validly taken all corporate action necessary to
authorize the execution, delivery and performance of this Agreement (and, with
respect to Satellite Company, the Notes).
(c) this Agreement (and, with respect to Satellite Company, the Notes)
has been duly executed and delivered by it and constitutes its legal, valid and
binding obligation enforceable in accordance with its terms.
(d) none of the execution and delivery of this Agreement (and, with
respect to Satellite Company, the Notes) or the compliance with any of the
provisions of this Agreement (and, with respect to Satellite Company, the Notes)
will (i) conflict with or result in a breach of any provision of its corporate
charter or by-laws, (ii) breach, violate or result in a default under any of the
terms of any agreement or other instrument or obligation (including, without
limitation, those in respect of Indebtedness) to which it or any of its
Subsidiaries is a party or by which it or any of its Subsidiaries' properties or
assets may be bound, or (ii) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to it or any of its Subsidiaries or
affecting any of its or any of its Subsidiaries' properties or assets.
10
<PAGE>
Exhibit 2.6
ARTICLE IV.
CONDITIONS OF LENDING
SECTION 4.01 Conditions Precedent. The obligation of TCIC to make a
--------------------
Loan hereunder on any date shall be subject to the satisfaction of TCIC with the
fulfillment of the following conditions precedent:
(a) TCIC shall have received a notice of such borrowing as required by
Section 2.01(b).
(b) The representations and warranties of Satellite Company set forth
in Article III shall be true and correct with the same effect as though made on
and as of such date.
(c) Satellite Company shall be in compliance with all of the terms and
conditions of this Agreement (including the Notes), and at the time of, and
immediately after such borrowing no Default or Event of Default shall have
occurred and be continuing.
(d) Satellite Company shall be in compliance, in all material respects
and subject to all applicable cure periods contained therein, with all of the
terms and conditions of the Indemnification Agreements, the Transition Services
Agreement, the Reorganization Agreement and the Fulfillment Agreement.
(e) TCIC shall have received from Satellite Company such additional
information and materials as TCIC shall have reasonably requested, and all
proceedings and documents in connection with any Loan shall be satisfactory to
counsel (which may be in-house counsel) for TCIC.
ARTICLE V.
COVENANTS
Satellite Company covenants and agrees with TCIC that, so long as this
Agreement shall remain in effect, or the principal of, or interest on any Loan
or any other amount payable hereunder shall be unpaid:
SECTION 5.01 Corporate Existence.
-------------------
11
<PAGE>
Exhibit 2.6
It will, and will cause each of its Subsidiaries to, do or cause to be
done all things necessary to preserve, renew and keep in full force and effect
its legal existence.
SECTION 5.02 Businesses and Properties.
-------------------------
It will, and will cause each of its Subsidiaries to, at all times do
or cause to be done all things necessary to preserve, renew and keep in full
force and effect the rights, licenses, permits, franchises, patents, copyrights,
trademarks and trade names material to the conduct of its business; comply in
all material respects with all laws and regulations applicable to the operation
of such business whether now in effect or hereafter; take all action which may
be required to obtain, preserve, renew and extend all licenses, permits and
other authorizations which may be material to the operation of such business;
and at all times maintain, preserve and protect all property material to the
conduct of such business and keep such property in good repair, working order
and condition.
SECTION 5.03 Obligations and Taxes.
---------------------
It will, and will cause each of its Subsidiaries to, pay and discharge
promptly when due all material taxes, assessments and governmental charges or
levies imposed upon it or upon its income or profits or in respect of its
property before the same shall become delinquent or in default, as well as all
lawful claims for labor, materials and supplies or otherwise, which, if unpaid,
might give rise to material liens or charges upon such properties or any part
thereof; provided, however, that neither Satellite Company nor any Subsidiary
-------- -------
shall be required to pay and discharge or to cause to be paid and discharged any
such tax, assessment, charge, levy or claim so long as the validity or amount
thereof shall be contested in good faith by appropriate proceedings and
Satellite Company or any such Subsidiary shall, to the extent required by
generally accepted accounting principles applied on a consistent basis, have set
aside on its books adequate reserves with respect thereto.
SECTION 5.04 Financial Statements; Reports, etc.
-----------------------------------
It will furnish to TCIC:
(a) promptly after the same become publicly available, copies of such
annual, periodic and other reports, and such proxy statements and other
information, as shall be filed by Satellite Company with the Securities and
Exchange Commission (the "SEC") pursuant to the requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), including, without
limitation, copies of the annual report and the
12
<PAGE>
Exhibit 2.6
information, documents and other reports (or copies of such portions of any of
the foregoing as the SEC may by rules and regulations prescribe) which Satellite
Company is required to file with the SEC pursuant to Section 13 or 15(d) of the
Exchange Act; provided; however, Satellite Company shall be permitted to deliver
its Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q at the
same times Satellite Company is required to file the corresponding certificate
described in section 5.04 (b) below.
(b) within 60 days after the end of each of the first three fiscal
quarters and within 120 days after the end of the last fiscal quarter of
Satellite Company, a certificate of the Chief Financial Officer of Satellite
Company certifying that to the best of his knowledge no Default or Event of
Default has occurred, and, if such a Default or Event of Default has occurred,
specifying the nature and extent thereof and any corrective action taken or
proposed to be taken with respect thereto; and
(c) promptly, from time to time, such other information regarding the
affairs, operations or condition (financial or otherwise) of Satellite Company
or any of its Subsidiaries as TCIC may reasonably request and which is capable
of being obtained, produced or generated by Satellite Company or any of its
Subsidiaries.
SECTION 5.05 Litigation and Other Notices.
----------------------------
It will give TCIC prompt written notice of the following:
(a) the issuance by any court or governmental agency or authority of
any injunction, order, decision or other restraint prohibiting, or having the
effect of prohibiting, the making of the Loans or invalidating, or having the
effect of invalidating, any provision of this Agreement or the Notes, or the
initiation of any litigation or similar proceeding seeking any such injunction,
order or other restraint;
(b) the filing or commencement of any action, suit or proceeding
against Satellite Company or any of its Subsidiaries, whether at law or in
equity or by or before any court or any Federal, state, municipal, foreign or
other governmental agency or authority as to which there is a reasonable
possibility of an adverse determination and which, if adversely determined
against the Satellite Company or any such Subsidiary, could materially impair
the ability to perform its obligations under this Agreement or the Notes or to
carry on business substantially as then conducted or materially and adversely
affect the business, assets, operations, prospects or condition (financial or
otherwise) of Satellite Company and its Subsidiaries (considered as a whole);
13
<PAGE>
Exhibit 2.6
(c) any Default or Event of Default, specifying the nature and extent
thereof and the action (if any) which is proposed to be taken with respect
thereto; and
(d) any event or condition which would permit the holder or obligee of
any Indebtedness of Satellite Company or any of its Subsidiaries in an aggregate
amount in excess of $5,000,000 to accelerate the maturity of such Indebtedness.
SECTION 5.06 Maintaining Records; Access to Properties and
---------------------------------------------
Inspections.
-----------
It will, and will cause each of its Subsidiaries to, maintain
financial records in accordance with generally accepted accounting practices
and, upon reasonable notice, at all reasonable times and as often as TCIC may
request, permit any authorized representative designated by TCIC to visit and
inspect the properties and financial records of Satellite Company and its
Subsidiaries, and to make extracts from such financial records at TCIC's
expense, and permit any authorized representative designated by TCIC to discuss
the affairs, finances and condition of Satellite Company or any such Subsidiary
with Satellite Company's or any such Subsidiary's Chief Financial Officer and
such other officers as Satellite Company or any such Subsidiary shall deem
appropriate and Satellite Company's or any such Subsidiary's independent public
accountants.
SECTION 5.07 Sales of Assets.
---------------
It will not, in one transaction or any series of related transactions,
sell, transfer or otherwise dispose of any asset or permit any Subsidiary so to
do (other than sales of inventory in the ordinary course of business),
including, without limitation, any stock or securities, without the prior
written consent of TCIC to such sale, transfer or disposition and the terms
thereof; provided, however, that, so long as no event has occurred which
-----------------
constitutes a Default or an Event of Default, no such consent shall be required
for any sale of any assets of any Subsidiary (including any stock or securities
issued by such Subsidiary and held by Satellite Company or any of its
Subsidiaries) so long as the aggregate consideration payable to the seller in
respect of such sale is in an amount not less than the fair market value of such
assets.
SECTION 5.08 Consolidations and Mergers.
--------------------------
It will not merge into or consolidate or combine with any other
Person, without the prior written consent of TCIC.
SECTION 5.09 Dividends, etc.
--------------
14
<PAGE>
Exhibit 2.6
It will not declare or pay any dividend or make any distribution on
its capital stock (other than dividends or distributions payable in common
stock), or purchase, redeem or otherwise acquire or retire for value any capital
stock of Satellite Company or permit any Subsidiary to purchase, redeem or
otherwise acquire or retire for value any capital stock of Satellite Company.
SECTION 5.10 Use of Proceeds.
---------------
Satellite Company shall use the proceeds of the Revolving Loans for
only the following purposes: (i) to fund working capital needs; (ii) to fund
capital expenditures contemplated by the October 1996 business plan of Satellite
Company (a copy of which is attached hereto as Exhibit C); (iii) to fund up to
$75,000,000 of capital expenditures and investments (other than expenditures for
acquisition transactions) which were not contemplated by the October 1996
business plan of Satellite Company; and (iv) to fund the Commitment Fees payable
under this Agreement.
SECTION 5.11 Subscriber Targets.
------------------
Satellite Company shall maintain the minimum number of Basic
Subscribers indicated in the table below at the end of each indicated
period:
Period Basic Subscribers
------ -----------------
12/31/96 629,000
3/31/97 693,000
6/30/97 775,000
9/30/97 857,000
12/31/97 921,000
SECTION 5.12 Financial Covenants.
-------------------
(a) Indebtedness to Basic Subscriber Ratio. From the Closing Date
--------------------------------------
through December 31, 1997, Satellite Company shall not incur Indebtedness in an
amount that would exceed at the time of calculation $600 per Basic Subscriber.
(b) Leverage Ratio. Satellite Company shall maintain at all times
--------------
during each period specified below a Leverage Ratio of not more than:
15
<PAGE>
Exhibit 2.6
Period Ratio
------ -----
1/1/98-3/31/98 7.75x
4/1/98-6/30/98 7.25x
7/1/98-9/30/98 7.0x
10/1/98-12/31/98 6.75x
1/1/99-6/30/99 6.5x
7/1/99-12/31/99 6.0x
1/1/00-6/30/00 5.5x
7/1/00-12/31/00 5.0x
Thereafter 4.5x
(c) Annualized Cash Flow/Annual Interest Expense Ratio. Satellite
-----------------------------------------------------
Company shall maintain at all times during each period specified below a ratio
of Annualized Cash Flow to Annual Interest Expense of not less than:
Closing Date-12/31/98 1.75x
Thereafter 2.00x
(d) Annualized Cash Flow/Pro-Forma Debt Service Ratio. Satellite
-------------------------------------------------
Company shall maintain at all times a ratio of Annualized Cash Flow to Pro-Forma
Debt Service of not less than 1.10 to 1 until the Maturity Date or prepayment of
the Loans.
SECTION 5.13 Debt or Equity Financing.
------------------------
Satellite Company shall use its best efforts to consummate an equity
or debt financing as soon as practicable in an amount sufficient to repay all
amounts due and owing under the Loans and, in the case of bank financing, in an
amount sufficient to replace the Revolving Loan Commitment hereunder.
ARTICLE VI.
DEFAULTS
If any one or more of the following events ("Events of Default") shall
occur and be continuing, TCIC may by notice to Satellite Company terminate the
Revolving Loan
16
<PAGE>
Exhibit 2.6
Commitment and/or declare the entire unpaid balance of the principal of, and
interest on any outstanding Loans to be forthwith due and payable, and thereupon
the same and any unpaid Commitment Fees and all other liabilities of Satellite
Company accrued hereunder shall immediately become due and payable without
further act, except that in the case of the occurrence of an Event of Default
described in Section 6.05, the Revolving Loan Commitment shall automatically
terminate and the unpaid balance of the principal of, and interest on all of the
outstanding Loans and any unpaid Commitment Fees and all other liabilities of
Satellite Company accrued hereunder shall automatically become due and payable
without any requirement of notice. Except for the notice provided for in the
immediately preceding sentence, Satellite Company hereby expressly waives any
presentment, demand, protest, notice of protest or other notice of any kind.
SECTION 6.01 Failure to Pay.
--------------
(a) Failure by Satellite Company to make any payment of principal on
or interest on the Loans when due, whether at maturity or at a date fixed for
prepayment or otherwise; provided, however, that no event of default shall be
-------- -------
deemed to occur upon a failure by Satellite Company to pay an optional
prepayment under section 2.03(b); or
(b) Failure by Satellite Company to pay the Commitment Fee in full
within five (5) days of the date such payment is due.
SECTION 6.02 Breach of Covenants.
-------------------
(a) Failure by Satellite Company to perform or observe any of the
agreements or covenants of Satellite Company set forth in Sections 5.01, 5.03,
5.07, 5.08, 5.09, 5.10, 5.11, or 5.12; or
(b) Failure by Satellite Company to perform or observe any other term,
covenant, or condition of this Agreement which shall remain unremedied for a
period of thirty days after TCIC shall have notified Satellite Company of such
failure.
SECTION 6.03 Breach of Debt Instrument. A default by Satellite
-------------------------
Company or any of its Subsidiaries in the payment of, principal of, or interest
on any Indebtedness in excess of $5,000,000, or the failure to observe or
perform any other agreement or condition relating to any such Indebtedness, or
the occurrence or failure to occur of any other event or condition, so that, as
a result of such default, failure to observe or perform, occurrence or failure
to occur, such Indebtedness is accelerated or may be declared due and payable
prior to the date on which such Indebtedness would otherwise become due and
payable, unless prior to
17
<PAGE>
Exhibit 2.6
the exercise by TCIC of any of its remedies hereunder (including acceleration of
the maturity of the Loans): (i) such default, failure to observe or perform,
occurrence or failure to occur has been cured in full or unconditionally waived
with the result that the payment of such Indebtedness may not thereafter be
accelerated on the basis thereof, or (ii) such declaration of acceleration has
been rescinded or annulled on terms satisfactory to TCIC, or (iii) Satellite
Company or such Subsidiary, as the case may be, shall have contested such
declaration of acceleration in good faith and by appropriate proceedings and
have obtained and thereafter maintained the stay of such acceleration and all
consequences thereof that would have a material adverse effect on Satellite
Company and its Subsidiaries (considered as a whole) or the rights of TCIC
hereunder.
SECTION 6.04 Breach of Representation. Any representation or
------------------------
warranty made by Satellite Company to TCIC in this Agreement, or in connection
with the making of any Loan, or in any certificate or other document furnished
by Satellite Company at any time under or in connection with this Agreement,
shall prove to have been false in any material respect when made.
SECTION 6.05 Bankruptcy, Etc. Satellite Company shall make an
---------------
assignment for the benefit of creditors, file a petition in bankruptcy, be
adjudicated insolvent or bankrupt, suffer an order for relief under any federal
bankruptcy law, petition or apply to any tribunal for the appointment of a
custodian, receiver or any trustee for it or a substantial part of its assets,
or shall commence any proceeding under any bankruptcy, reorganization,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, whether now or hereafter in effect; or if there shall have
been filed any such petition or application, or any such proceeding shall have
been commenced against it, which remains undismissed for a period of thirty (30)
days or more; or Satellite Company, by any act or omission, shall indicate its
consent to, approval of, or acquiescence in any such petition, application or
proceeding or the appointment of a custodian, receiver or any trustee for it or
any substantial part of any of its properties, or shall suffer any
custodianship, receivership or trusteeship to continue undischarged for a period
of thirty (30) days or more.
SECTION 6.06 Judgments, Etc. Any judgment against Satellite Company
--------------
or any of its Subsidiaries for any amount in excess of $5,000,000 shall remain
unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period
of thirty (30) days or more.
SECTION 6.07 Material Adverse Changes. A material adverse change in
------------------------
the business, assets, operations, prospects or condition (financial or
otherwise) of Satellite Company and any of its Subsidiaries, taken as a whole
shall have occurred.
18
<PAGE>
Exhibit 2.6
ARTICLE VII.
MISCELLANEOUS
SECTION 7.01 Severability. If any term, provision, covenant or
------------
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such which may be hereafter declared invalid, void or
unenforceable. In the event that any such term, provision, covenant or
restriction is so held to be invalid, void or unenforceable, the parties hereto
shall use their best efforts to find and employ an alternative means to achieve
the same or substantially the same result as that contemplated by such term,
provision or restriction.
SECTION 7.02 Assignment. This Agreement shall not be assignable, in
----------
whole or in part, directly or indirectly, by operation of law or otherwise, by
Satellite Company without the prior written consent of TCIC, and any attempt by
Satellite Company to assign any rights or obligations arising under this
Agreement without such consent shall be void. TCIC may assign the Notes in
whole or in part. TCIC may assign this Agreement with the prior written consent
of Satellite Company, which consent shall not be unreasonably withheld. The
provisions of this Agreement shall be binding upon, inure to the benefit of, and
be enforceable by TCIC and Satellite Company and their respective successors
(subject, as to Satellite Company, to the first sentence above) and permitted
assigns.
SECTION 7.03 Further Assurances. Subject to the provisions hereof,
------------------
each of TCIC and Satellite Company shall make, execute, acknowledge and deliver
such other instruments and documents, and take all such other actions as may be
reasonably required in order to effectuate the purposes of this Agreement and to
consummate the transactions contemplated hereby. Subject to the provisions
hereof, each of TCIC and Satellite Company shall, in connection with entering
into this Agreement, performing its obligations hereunder and taking any and all
actions relating thereto, comply with all applicable laws, regulations, orders
and decrees, obtain all required consents and approvals and make all required
filings with any governmental agency, other regulatory or administrative agency,
commission or similar authority and promptly provide the other with all such
information as the other may reasonably request in order to be able to comply
with the provisions of this sentence.
19
<PAGE>
Exhibit 2.6
SECTION 7.04 Parties in Interest. Nothing in this Agreement
-------------------
expressed or implied is intended or shall be construed to confer any right or
benefit upon any person, firm or corporation other than TCIC and Satellite
Company and their respective successors (subject, as to Satellite Company, to
the first sentence of Section 7.02) and permitted assigns.
SECTION 7.05 Waivers, Etc. No failure or delay on the part of TCIC
------------
in exercising any power or right hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No modification or waiver of any provision of this Agreement
nor consent to any departure by TCIC therefrom shall in any event be effective
unless the same shall be in writing, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given.
SECTION 7.06 Setoff. All payments to be made by Satellite Company
------
under this Agreement shall be made without setoff, counterclaim or withholding,
all of which are expressly waived.
SECTION 7.07 Confidentiality. Subject to any contrary requirement of
---------------
law and the right of each party to enforce its rights hereunder in any legal
action, each party shall keep strictly confidential and shall cause its
employees and agents to keep strictly confidential, any information which it or
any of its agents or employees may acquire pursuant to, or in the course of
performing its obligations under, any provision of this Agreement; provided,
--------
however, that such obligation to maintain confidentiality shall not apply to
- -------
information which (x) at the time of disclosure was in the public domain not as
a result of acts by the receiving party or (y) was in the possession of the
receiving party at the time of disclosure.
SECTION 7.08 Entire Agreement. This Agreement (including the
----------------
Exhibits hereto) and the Notes contain the entire understanding of the parties
with respect to the transactions contemplated hereby.
SECTION 7.09 Headings. Descriptive headings are for convenience only
--------
and shall not control or affect the meaning or construction of any provision of
this Agreement.
SECTION 7.10 Counterparts. For the convenience of the parties, any
------------
number of counterparts of this Agreement may be executed by the parties hereto,
and each such executed counterpart shall be, and shall be deemed to be, an
original instrument.
20
<PAGE>
Exhibit 2.6
SECTION 7.11 Notices. All notices and other communications provided
-------
for herein or made hereunder shall be in writing and shall be hand delivered,
telecopied or mailed to the intended recipient at the telephone number or
address specified below:
Satellite Company: TCI Satellite Entertainment, Inc.
8085 S. Chester Street, Suite 300
Englewood, Colorado 80112
Attn: Chief Financial Officer
Facsimile: (303) 712-4973
With a copy similarly addressed: Attention: Legal Department
TCIC: TCI Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attn: Treasurer
Facsimile: (303) 488-3200
With a copy similarly addressed: Attention: Legal Department
or to such other telephone number or address as shall be designated by such
party in a notice to the other party. All notices and other communications
hereunder shall be deemed delivered and received: (i) in the case of a telecopy,
when transmitted by telecopier, answer back received, (ii) in the case of
personal delivery, when delivered, and (iii) in the case of a mailing, three
Business Days after deposited in the mails (registered or certified mail, return
receipt requested, postage prepaid), in each case given or addressed as
aforesaid. Telephonic notice may be given, provided it is promptly confirmed by
the sender by telecopy as aforesaid.
SECTION 7.13 Governing Law. This Agreement shall be governed by and
-------------
construed and enforced in accordance with the laws of the State of Colorado
applicable to contracts made and to be performed therein.
21
<PAGE>
Exhibit 2.6
IN WITNESS WHEREOF, TCIC and Satellite Company have caused this
Agreement to be duly executed by their respective officers, each of whom is duly
authorized, all as of the day and year first above written.
TCI COMMUNICATIONS, INC.
-------------------------------
By:
Title:
TCI SATELLITE ENTERTAINMENT, INC.
-----------------------------------------
By:
Title:
22
<PAGE>
Exhibit 2.6
EXHIBIT A
Initial Loans
<TABLE>
<CAPTION>
<S> <C>
Principal Amount Date of Loan
- ------------------ ------------
</TABLE>
23
<PAGE>
Exhibit 2.6
EXHIBIT B-1
FORM OF TERM LOAN NOTE
----------------------
$250,000,000 Englewood, Colorado
___________, 1996
FOR VALUE RECEIVED, effective as of the date first above written, the
undersigned, TCI SATELLITE ENTERTAINMENT, INC., a Delaware corporation (the
"Borrower"), hereby promises to pay to the order of TCI COMMUNICATIONS, INC., a
Delaware corporation, or assigns ("Lender"), at the principal executive office
of Lender, the principal sum of TWO HUNDRED FIFTY MILLION DOLLARS
($250,000,000), in lawful money of the United States of America in immediately
available funds, and to pay interest from the date first above specified on the
principal amount hereof from time to time outstanding, in like funds, at said
office, at a rate or rates per annum and payable on the dates determined
pursuant to the Credit Agreement, dated as of _______, 1996, by and between
Borrower and Lender (the "Agreement").
The Borrower promises to pay interest, on demand, on any overdue
principal and, to the extent permitted by law, overdue interest from the due
date at a rate or rates determined as set forth in the Agreement.
The Borrower hereby waives diligence, presentment, demand, protest and
notice (except for the notice required by section 6.01 of the Agreement) of any
kind whatsoever. The nonexercise by the holder of any of its rights hereunder
in any particular instance shall not constitute a waiver thereof in that or any
subsequent instance.
All borrowings evidenced by this Note and all payments and prepayments
of the principal hereof and interest hereon and the respective dates thereof
shall be endorsed by the holder hereof on the schedule attached hereto and made
a part hereof, or otherwise recorded by such holder in its internal records;
provided, however, that the failure of the holder hereof to make such a notation
- -------- -------
or any error in such a notation shall not affect the obligations of the Borrower
under this Note.
In the event of any action at law or suit in equity with respect to
this Note, the Borrower, in addition to all other sums which it may be required
to pay hereunder, will pay a reasonable sum for attorneys' fees incurred by the
holder hereof in connection with such action or suit and all other costs of
collection.
24
<PAGE>
Exhibit 2.6
This Note is one of the Notes referred to in the Agreement and is
entitled to the benefits, and is subject to the terms, set forth therein, which,
among other things, contains provisions for the acceleration of the maturity
hereof upon the happening of certain events, for optional and mandatory
prepayment of the principal hereof prior to the maturity hereof and for the
amendment or waiver of certain provisions of the Agreement, all upon the terms
and conditions therein specified. This Note shall be construed in accordance
with and governed by the laws of the State of Colorado and any applicable laws
of the United States of America.
TCI SATELLITE ENTERTAINMENT, INC.
By:
--------------------------------
Title:
-----------------------------
25
<PAGE>
Exhibit 2.6
<TABLE>
<CAPTION>
SCHEDULE
LOANS AND PAYMENTS
- --------------------------------------------------------------
Payments
---------
- --------------------------------------------------------------
Unpaid Name of
Principal Person
Amount and Balance Making
Date Type of Loan Principal Interest of Note Notation
- ------ ------------ --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
26
<PAGE>
Exhibit 2.6
EXHIBIT B-2
FORM OF REVOLVING LOAN NOTE
---------------------------
$500,000,000 Englewood, Colorado
___________, 1996
FOR VALUE RECEIVED, effective as of the date first above written, the
undersigned, TCI SATELLITE ENTERTAINMENT, INC., a Delaware corporation (the
"Borrower"), hereby promises to pay to the order of TCI COMMUNICATIONS, INC., a
Delaware corporation, or assigns ("Lender"), the lesser of the principal sum of
FIVE HUNDRED MILLION DOLLARS ($500,000,000) and the aggregate unpaid principal
amount of the outstanding Revolving Loans to the Borrower from the Lender
pursuant to the Credit Agreement, dated as of _________, 1996, by and between
the Borrower and the Lender (as the same may be amended or otherwise modified
from time to time, the "Agreement"), in lawful money of the United States of
America, in immediately available funds, and to pay interest from the date first
above specified on the principal amount hereof from time to time outstanding, in
like funds, at said office, at a rate or rates per annum and payable on the
dates determined pursuant to the Agreement.
The Borrower promises to pay interest, on demand, on any overdue
principal and, to the extent permitted by law, overdue interest from the due
date at a rate or rates determined as set forth in the Agreement.
The Borrower hereby waives diligence, presentment, demand, protest and
notice (except for the notice required by section 6.01 of the Agreement) of any
kind whatsoever. The nonexercise by the holder of any of its rights hereunder
in any particular instance shall not constitute a waiver thereof in that or any
subsequent instance.
All borrowings evidenced by this Note and all payments and prepayments
of the principal hereof and interest hereon and the respective dates thereof
shall be endorsed by the holder hereof on the schedule attached hereto and made
a part hereof, or otherwise recorded by such holder in its internal records;
provided, however, that the failure of the holder hereof to make such a notation
- -------- -------
or any error in such a notation shall not affect the obligations of the Borrower
under this Note.
In the event of any action at law or suit in equity with respect to
this Note, the Borrower, in addition to all other sums which it may be required
to pay hereunder, will pay a
27
<PAGE>
Exhibit 2.6
reasonable sum for attorneys' fees incurred by the holder hereof in connection
with such action or suit and all other costs of collection.
This Note is one of the Notes referred to in the Agreement and is
entitled to the benefits, and is subject to the terms, set forth therein, which,
among other things, contains provisions for the acceleration of the maturity
hereof upon the happening of certain events, for optional and mandatory
prepayment of the principal hereof prior to the maturity hereof and for the
amendment or waiver of certain provisions of the Agreement, all upon the terms
and conditions therein specified. This Note shall be construed in accordance
with and governed by the laws of the State of Colorado and any applicable laws
of the United States of America.
TCI SATELLITE ENTERTAINMENT, INC.
By:
-----------------------------------------
Title:
--------------------------------------
28
<PAGE>
Exhibit 2.6
<TABLE>
<CAPTION>
SCHEDULE
LOANS AND PAYMENTS
- --------------------------------------------------------------
Payments
---------
- --------------------------------------------------------------
Unpaid Name of
Principal Person
Amount and Balance Making
Date Type of Loan Principal Interest of Note Notation
- ------ ------------ --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
29
<PAGE>
Exhibit 2.6
EXHIBIT C
Satellite Company Business Plan
30
<PAGE>
EXHIBIT 2.7
[Form of]
SHARE PURCHASE AGREEMENT
Share Purchase Agreement (this "Agreement"), dated as of ,
1996, by and between Tele-Communications, Inc., a Delaware corporation ("TCI"),
and TCI Satellite Entertainment, Inc., a Delaware corporation ("TCISE").
RECITALS
A. TCI owns all the issued and outstanding capital stock of TCISE
("TCISE Stock"). TCI intends to distribute (the "Distribution") the TCISE Stock
to the holders of its Tele-Communications, Inc. Series A TCI Group Common Stock
and Tele-Communications Inc. Series B TCI Group Common Stock (together, the "TCI
Group Stock"). As a result of the Distribution, TCISE will cease to be a
subsidiary of TCI, and TCI and TCISE will be separate public companies.
B. In connection with the Distribution, TCI has granted to certain of
its employees and directors options ("TCI Options") to purchase shares of Series
A Common Stock, par value $1.00 per share, of TCISE ("TCISE Series A Stock") and
TCISE has granted to certain of its employees and directors options ("TCISE
Options") to purchase shares of Tele-Communications, Inc. Series A TCI Group
Common Stock, par value $1.00 per share, of TCI ("TCI Series A Stock"). The TCI
Options are sole and separate obligations of TCI and the TCISE Options are
sole and separate obligations of TCISE.
C. As a result of the Distribution, the conversion mechanism for the
TCI Series D Convertible Preferred Stock ("TCI Preferred Stock") will be
adjusted so that, on conversion, holders of TCI Preferred Stock will receive, in
addition to shares of TCI Series A Group Stock, the same number of shares of
TCISE Series A Stock that they would have received had they converted their TCI
Preferred Stock to TCI Group Stock (and Tele-Communications, Inc. Series A
Liberty Media Group Common Stock) prior to the Distribution.
D. As a result of the Distribution, the conversion mechanism for the
Convertible Notes due December 12, 2021 of TCI UA, Inc. ("Convertible Notes")
will be adjusted so that, on conversion, holders of Convertible Notes may be
entitled to receive shares of TCISE Series A Stock in addition to shares of TCI
Series A Stock.
E. This Agreement sets forth the terms and conditions on which,
from time to time, (i) TCI shall have the right to purchase from TCISE and
TCISE shall have the obligation to sell to TCI shares of TCISE Series A Stock in
such amounts as may be required from time to time to satisfy TCI's obligations
following the Distribution under the TCI Options, the TCI Preferred Stock, the
Convertible Notes and any other securities issued by
<PAGE>
TCI prior to the Distribution that following the Distribution may be
exchangeable or convertible in whole or in part for TCISE Stock; and (ii) TCISE
shall have the right to purchase from TCI and TCI shall have the obligation to
sell to TCISE shares of TCI Series A Stock in such amounts as required to
satisfy TCISE's obligations under the TCISE Options.
NOW, THEREFORE, in consideration of the mutual covenants contained in
the Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1 Call Rights.
Immediately upon notice to TCI or TCISE (a "Purchaser"), as
applicable, by a securityholder of such Purchaser that such securityholder is
exercising (i) a TCI Option or TCISE Option, as applicable, (ii) a conversion
privilege of the TCI Preferred Stock or the Convertible Notes, or (iii) an
exchange or conversion privilege of any other security issued by TCI (an
"Exercise Notice"), the Purchaser shall have the right, exercisable upon written
notice (a "Call Notice") thereof, given at any time within ten business days
after receipt of such Exercise Notice, to require the other party hereto (the
"Issuer") to sell to the Purchaser, at the Purchase Price (as defined below) per
share as of the date of such Call Notice, the number of shares of TCISE Series A
Stock or TCI Series A Stock, as applicable, that are issuable upon such
exercise, as indicated in such Exercise Notice.
Section 2 Call Notices.
(a) Notice. A Call Notice shall state the number of shares to be
------
purchased pursuant to Section 1 above, the date upon which the sale of shares of
TCI Series A Stock or TCISE Series A Stock subject thereto shall take place
(which shall be at least three and not more than five business days after the
date of such Call Notice), the name or names of the persons to whom such shares
are to be issued and the Purchase Price per share of such shares. The Purchaser
shall attach to each Call Notice a copy of the Exercise Notice to which such
Call Notice relates.
(b) Purchase Price. The "Purchase Price" of a share of TCI Series A
--------------
Stock or TCISE Series A Stock, as applicable, as of any date, shall be the
average of the daily closing prices for such stock for the most recent period of
ten trading days on which such stock trades immediately preceding such date,
appropriately adjusted to take into account the actual occurrence, during the
period following the first of such ten trading days and ending on such date, of
any stock dividends, splits, reverse splits, combinations and the like. The
closing price for each day shall be the last reported sale price regular way (or
if no such reported sale takes place on such day, the average of the reported
closing bid and asked prices, regular way) on the composite tape, or if the
applicable securities are not quoted on the composite tape, on the principal
United States securities exchange registered under the Securities Exchange Act
of 1934 on which such securities are listed or admitted to trading or, if the
applicable securities are not listed or admitted to trading on any
<PAGE>
such exchange, then the closing sale price (or the average of the quoted closing
bid and asked prices if no sale is reported) as reported by NASDAQ or any
comparable system, or if the applicable securities are not quoted on NASDAQ or
any comparable system, the average of the closing bid and asked prices as
furnished by any member of the National Association of Securities Dealers, Inc.
selected by the Purchaser. The Issuer shall have one business day to confirm
the Purchase Price as set forth in the Call Notice. If the Issuer in good faith
disputes the Purchase Price set forth in the Call Notice, such dispute must be
given by written notice to the Purchaser on the first business day following the
date of the Call Notice which notice shall state the amount which the Issuer
believes to be the correct Purchase Price. If the Purchaser and the Issuer have
not agreed on the amount of the Purchase Price by 5:00 p.m. Mountain Time of
the day immediately prior to the date of the sale, the Purchase Price shall be
the average of the amounts noticed by the Purchaser and the Issuer.
(c) Designees. The Purchaser may require the shares to be issued
---------
pursuant to Section 1 above in either the Purchaser's name or in the name of its
designee. If the Purchaser requests the issuance of the shares to be made in the
name of the Purchaser's designee , such designee shall be the securityholder
named in the Exercise Notice(s) to which the Call Notice relates.
Section 3 Representations and Warranties.
(a) Purchasers. Each Purchaser represents and warrants that it
----------
shall give a Call Notice and purchase shares under this Agreement only in such
amounts and at such times (w) as required by the exercise of TCI Options or
TCISE Options, as applicable; (x) as required by the conversion of the TCI
Preferred Stock or the Convertible Notes; (y) as required by the exchange or
conversion, in whole or in part, of any other securities issued by TCI; or (z)
as otherwise mutually agreed upon by TCI and TCISE.
(b) Issuers. Each Issuer represents and warrants that:
-------
(i) all the shares of TCI Series A Stock or TCISE Series A
Stock, as applicable, sold pursuant to this Agreement shall be duly and validly
authorized by the Issuer and, upon the issuance and delivery of such shares
against payment therefor by the Purchaser, such shares will be duly and validly
issued and fully paid and non-assessable; and
(ii) all the shares of TCI Series A Stock or TCISE Series A
Stock, as applicable, sold pursuant to this Agreement are, or at the time of
issuance will be, registered under the Securities Act of 1933, as amended (the
"Securities Act"), or are, or at the time of issuance will be, exempt from such
registration pursuant to Rule 144 of the General Rules and Regulations of the
Securities and Exchange Commission under the Securities Act.
<PAGE>
Section 4 Miscellaneous.
(a) Successors and Assigns. This Agreement and the rights,
----------------------
interests or obligations hereunder shall not be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other party. Any assignment or delegation in contravention of
this Agreement shall be void and shall not relieve the assigning or delegating
party of any obligation hereunder. Subject to the foregoing provisions of this
Section 4(a), this Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective successors and permitted assigns.
(b) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
(c) Notices. All notices and other communications required or
-------
permitted to be given by any provision of this Agreement shall be in writing and
sent, for same day delivery, by hand or by facsimile transmission (with
acknowledgment received), charges prepaid and addressed to the intended
recipient as follows, or to such other address or number as may be specified
from time to time by like notice to the parties:
(i) If to TCI:
Tele-Communications, Inc.
5619 DTC Parkway
Englewood, CO 80111-3000
Facsimile: (303) 488-3245
Attention: General Counsel
(ii) If to TCISE:
TCI Satellite Entertainment, Inc.
8085 South Chester #300
Englewood, CO 80112
Facsimile: (303) 712-4974
Attention: Corporate Counsel
(d) Headings. The section headings used in this Agreement are for
--------
reference purposes only and shall not affect the meaning or interpretation of
any term or provision of this Agreement.
<PAGE>
(e) Entire Agreement; No Third-Party Beneficiaries. This Agreement
----------------------------------------------
(i) constitutes the entire agreement, and supersedes all prior agreements and
understandings, both written and oral, between TCI and TCISE with respect to the
subject matter of this Agreement, and (ii) is not intended to confer any rights
or remedies upon any person other than the parties hereto and their successors
and permitted assigns.
Dated: , 1996
----------
TELE-COMMUNICATIONS, INC.
By:
--------------------------
Name:
Title:
TCI SATELLITE ENTERTAINMENT, INC.
By:
--------------------------
Name:
Title:
<PAGE>
EXHIBIT 3.2
BYLAWS
of
TCI Satellite Entertainment Inc.
As adopted ______________, 1996
<PAGE>
TCI SATELLITE ENTERTAINMENT INC.
A DELAWARE CORPORATION
BYLAWS
________________________
ARTICLE I
STOCKHOLDERS
Section 1.1 Annual Meeting.
--------------
An annual meeting of stockholders for the purpose of electing
directors and of transacting such other business as may come before it shall be
held each year at such date, time, and place, either within or without the State
of Delaware, as may be specified by the Board of Directors in the notice of
meeting.
Section 1.2 Special Meetings.
----------------
Except as otherwise provided in the terms of any series of preferred
stock or unless otherwise provided by law or by the Certificate of
Incorporation, special meetings of stockholders of the Corporation, for any
purpose or purposes, shall be called by the Secretary of the Corporation only
(i) upon written request of the holders of not less than 66 2/3% of the total
voting power of the outstanding capital stock of the Corporation entitled to
vote at such meeting or (ii) at the request of not less than 75% of the members
of the Board of Directors then in office. Special meetings of
1
<PAGE>
stockholders for any purpose or purposes may be held at such time and place
either within or without the State of Delaware as may be stated in the notice of
meeting.
Section 1.3 Notice of Meetings.
------------------
Written notice of stockholders meetings, stating the place, date, and
hour thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman of the Board, the
President, any Vice President, the Secretary, or an Assistant Secretary, to each
stockholder entitled to vote thereat at least ten days but not more than sixty
days before the date of the meeting, unless a different period is prescribed by
law.
Section 1.4 Notice of Nominations for the Election of Directors.
---------------------------------------------------
1.4.1 Annual Meetings of Stockholders.
-------------------------------
(a) Nominations of persons for election to the Board of Directors
of the Corporation may be made at an annual meeting of stockholders (i) pursuant
to the Corporation's notice of meeting delivered pursuant to Section 1.3 of
these Bylaws, (ii) by or at the direction of the Chairman of the Board or the
Board of Directors or (iii) by any stockholder of the Corporation who is
entitled to vote at the meeting, who complied with the notice procedures set
forth in this Bylaw and who was a stockholder of record at the time such notice
is delivered to the Secretary of the Corporation.
(b) For nominations to be properly made at an annual meeting by a
stockholder pursuant to clause (iii) of Section 1.4.1(a) of this Bylaw, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder's notice shall be delivered to the
Secretary at the principal executive offices of the Corporation not less than
ninety days nor more than one hundred twenty days prior to the first anniversary
of the preceding
2
<PAGE>
year's annual meeting; provided, however, that in the event that the date of the
annual meeting is advanced by more than twenty days, or delayed by more than
seventy days, from such anniversary date, notice by the stockholder to be timely
must be so delivered not earlier than the one hundred twentieth day prior to
such annual meeting and not later than the close of business on the later of the
ninetieth day prior to such annual meeting or the tenth day following the day on
which public announcement of the date of such meeting is first made. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected; and
(b) as to the stockholder giving the notice and the beneficial owner, if any,
on whose behalf the nomination or proposal is made (i) the name and address of
such stockholder, as they appear on the Corporation's books, and of such
beneficial owner, (ii) the series and number of shares of the Corporation which
are of record and owned beneficially by such stockholder and such beneficial
owner and (iii) a representation that such stockholder is entitled to vote at
the meeting and intends to appear in person or proxy at the meeting to nominate
the person specified in the notice.
1.4.2 Special Meetings of Stockholders.
--------------------------------
Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting pursuant to Section 1.3 of these Bylaws.
Nominations of persons for election to the Board of Directors may be
3
<PAGE>
made at a special meeting of stockholders at which directors are to be elected
pursuant to the Corporation's notice of meeting (a) by or at the direction of
the Board of Directors or (b) by any stockholder of the Corporation who is
entitled to vote at the meeting, who complied with the notice procedures set
forth in this Bylaw and who was a stockholder of record at the time such notice
is delivered to the Secretary of the Corporation. For nominations to be
properly made at such a special meeting by a stockholder pursuant to clause (b)
of the preceding sentence, the stockholder must have given timely written notice
to the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation not earlier than the one hundred twentieth day prior to such special
meeting and not later than the close of business on the later of the ninetieth
day prior to such special meeting or the tenth day following the day on which
public announcement is first made of the date of the special meeting.
1.4.3 General.
-------
(a) Only persons who are nominated in accordance with the
procedures set forth in this Bylaw shall be eligible to serve as directors.
Except as otherwise provided by law, the Certificate of Incorporation or these
Bylaws, the chairman of the meeting shall have the power and duty to determine
whether a nomination was made in accordance with the procedures set forth in
this Bylaw and, if any proposed nomination is not in compliance with this Bylaw,
to declare that such defective nomination shall be disregarded.
(b) For purposes of this Bylaw, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with Securities and Exchange Commission pursuant to Section 13, 14
or 15(d) of the Exchange Act.
4
<PAGE>
(c) Notwithstanding the foregoing provisions of this Bylaw, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
Section 1.5 Quorum.
------
Subject to the rights of the holders of any series of preferred stock
and except as otherwise provided by law or in the Certificate of Incorporation
or these Bylaws, at any meeting of stockholders, the holders of a majority in
total voting power of the outstanding shares of stock entitled to vote at the
meeting shall be present or represented by proxy in order to constitute a quorum
for the transaction of any business. In the absence of a quorum, the holders of
a majority in total voting power of the shares that are present in person or by
proxy or the chairman of the meeting may adjourn the meeting from time to time
in the manner provided in Section 1.6 of these Bylaws until a quorum shall
attend.
Section 1.6 Adjournment.
-----------
Any meeting of stockholders, annual or special, may adjourn from time
to time to reconvene at the same or some other place, and notice need not be
given of any such adjourned meeting if the time and place thereof are announced
at the meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
5
<PAGE>
Section 1.7 Organization.
------------
The Chairman of the Board, or in his absence the President, or in
their absence any Vice President, shall call to order meetings of stockholders
and shall act as chairman of such meetings. The Board of Directors or, if the
Board fails to act, the stockholders, may appoint any stockholder, director, or
officer of the Corporation to act as chairman of any meeting in the absence of
the Chairman of the Board, the President and all Vice Presidents.
The Secretary shall act as secretary of all meetings of stockholders,
but, in the absence of the Secretary, the chairman of the meeting may appoint
any other person to act as secretary of the meeting.
Section 1.8 Voting.
------
Subject to the rights of the holders of any series of preferred stock
and except as otherwise provided by law, the Certificate of Incorporation or
these Bylaws and except for the election of directors, at any meeting duly
called and held at which a quorum is present, the affirmative vote of a majority
of the combined voting power of the shares present in person or represented by
proxy at the meeting and entitled to vote on the subject matter shall be the act
of the stockholders. Subject to the rights of the holders of any series of
preferred stock, at any meeting duly called and held for the election of
directors at which a quorum is present, directors shall be elected by a
plurality of the combined voting power of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors.
Section 1.9 Voting List.
-----------
(a) A complete list of the stockholders of the Corporation
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number
6
<PAGE>
and series of shares registered in the name of each stockholder shall be
prepared by the officer who has charge of the stock ledger of the Corporation at
least 10 days before every meeting of stockholders. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
(b) Upon the willful neglect or refusal of the directors to produce
such a list at any meeting for the election of directors, they shall be
ineligible for election to any office at such meeting.
(c) The stock ledger shall be the only evidence as to who are the
stockholders entitled to vote in person or by proxy at any meeting of
stockholders or entitled to examine the stock ledger, the list required by this
section or the books of the Corporation.
Section 1.10 Stockholder Action Without a Meeting.
------------------------------------
Subject to the rights of the holders of any series of preferred stock,
stockholder action may be taken only at an annual or special meeting. Except as
otherwise provided in the terms of any series of preferred stock, no action
required to be taken or which may be taken at any annual meeting or special
meeting of stockholders may be taken without a meeting, and the power of
stockholders to consent in writing, without a meeting, is specifically denied.
7
<PAGE>
Section 1.11. Inspectors of Election.
----------------------
The Corporation may, and shall if required by law, in advance of any
meeting of stockholders, appoint one or more inspectors of election, who may be
employees of the Corporation, to act at the meeting or any adjournment thereof
and to make a written report thereof. The Corporation may designate one or more
persons as alternate inspectors to replace any inspector who fails to act. In
the event that no inspector so appointed or designated is able to act at a
meeting of stockholders, the person presiding at the meeting shall appoint one
or more inspectors to act at the meeting. Each inspector, before entering upon
the discharge of his or her duties, shall take and sign an oath to execute
faithfully the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspector or inspectors so appointed or
designated shall (i) ascertain the number of outstanding shares of capital stock
of the Corporation and the voting power of each such share, (ii) determine the
shares of capital stock of the Corporation represented at the meeting and the
validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period a record of the disposition of any
challenges made to any determination by the inspectors, and (v) certify their
determination of the number of shares of capital stock of the Corporation
represented at the meeting and such inspectors' count of all votes and ballots.
Such certification and report shall specify such other information as may be
required by law. In determining the validity and counting of proxies and
ballots cast at any meeting of stockholders of the Corporation, the inspectors
may consider such information as is permitted by applicable law. No person who
is a candidate for an office at an election may serve as an inspector at such
election.
8
<PAGE>
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Number and Term of Office.
-------------------------
(a) The governing body of this Corporation shall be a Board of
Directors. Subject to any rights of the holders of any series of preferred
stock to elect additional directors, the Board of Directors shall be comprised
of not less than three (3) members. The Board of Directors, by resolution
adopted by the affirmative vote of 75% of the members of the Board of Directors
then in office, may increase or decrease the number of directors. Directors
need not be stockholders of the Corporation.
(b) Except as otherwise fixed by the Certificate of Incorporation
relating to the rights of the holders of any series of preferred stock to
separately elect additional directors, which additional directors are not
required to be classified pursuant to the terms of such series of preferred
stock, the Board of Directors shall be divided into three classes: Class I,
Class II and Class III. Each class shall consist, as nearly as possible, of a
number of directors equal to one-third (33 1/3%) of the then authorized number
of members of the Board of Directors. The term of office of the initial Class I
directors shall expire at the annual meeting of stockholders in 1997; the term
of office of the initial Class II directors shall expire at the annual meeting
of stockholders in 1998; and the term of office of the initial Class III
directors shall expire at the annual meeting of stockholders in 1999. At each
annual meeting of stockholders of the Corporation the successors of that class
of directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meting of stockholders held in the third year
following the year of their election. The directors of each class will serve
until their respective successors are elected and qualified.
9
<PAGE>
Section 2.2 Resignations.
------------
Any director of the Corporation, or any member of any committee, may
resign at any time by giving written notice to the Board of Directors, the
Chairman of the Board, the President or Secretary of the Corporation. Any such
resignation shall take effect at the time specified therein or, if the time be
not specified therein, then upon receipt thereof. The acceptance of such
resignation shall not be necessary to make it effective unless otherwise stated
therein.
Section 2.3 Removal of Directors.
--------------------
Subject to the rights of the holders of any series of preferred stock,
directors may be removed from office only for cause (as hereinafter defined),
but not without cause, upon the affirmative vote of the holders of not less than
66 2/3% of the total voting power of the then outstanding capital stock of the
Corporation entitled to vote thereon, voting together as a single class. Except
as may otherwise be provided by law, "cause" for removal, for purposes of this
Section, shall exist only if: (i) the director whose removal is proposed has
been convicted of a felony, or has been granted immunity to testify in an action
where another has been convicted of a felony, by a court of competent
jurisdiction and such conviction is no longer subject to direct appeal; (ii)
such director has became mentally incompetent, whether or not so adjudicated,
which mental incompetence directly affects his ability as a director of the
Corporation, as determined by not less than 66 2/3% of the members of the Board
of Directors then in office (other than such director); or (iii) such director's
actions or failure to act have been determined by at least 66 2/3% of the
members of the Board of Directors then in office (other than such director) to
be in derogation of the director's duties.
10
<PAGE>
Section 2.4 Newly Created Directorships and Vacancies.
-----------------------------------------
Subject to the rights of the holders of any series of preferred stock,
vacancies on the Board of Directors resulting from death, resignation, removal,
disqualification or other cause, and newly created directorships resulting from
any increase in the number of directors on the Board of Directors, shall be
filled by the affirmative vote of a majority of the remaining directors then in
office (even though less than a quorum) or by the sole remaining director. Any
director elected in accordance with the preceding sentence shall hold office for
the remainder of the full term of the class of directors in which the vacancy
occurred or to which the new directorship is apportioned, and until such
director's successor shall have been elected and qualified. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director, except as may be provided in the terms of any series
of preferred stock with respect to any additional director elected by the
holders of such series of preferred stock.
Section 2.5 Chairman of the Board.
---------------------
The directors shall elect one of their members to be Chairman of the
Board of Directors. He shall perform such duties as may from time to time be
assigned to him by the Board of Directors. The Chairman of the Board shall be
subject to the control of and may be removed from such office by the Board of
Directors.
Section 2.6 Meetings.
--------
The annual meeting of the Board of Directors, for the election of
officers and the transaction of such other business as may come before the
meeting, shall be held either (a) without notice at the same place as, and
immediately following, the annual meeting of the stockholders or
11
<PAGE>
(b) as soon as practicable after the annual meeting of stockholders on such date
and at such time and place as the Board of Directors determines.
Notice of each regular meeting shall be furnished in writing to each
member of the Board of Directors not less than five days in advance of said
meeting, unless such notice requirement is waived in writing by each member. No
notice need be given of the meeting immediately following an annual meeting of
stockholders.
Special meetings of the Board of Directors shall be held at such time
and place as shall be designated in the notice of the meeting. Special meetings
of the Board of Directors may be called by the Chairman of the Board, and shall
be called by the President or Secretary of the Corporation upon the written
request of not less than 75% of the members of the Board of Directors then in
office.
Section 2.7 Notice of Special Meetings.
--------------------------
The Secretary, or in his absence any other officer of the Corporation,
shall give each director notice of the time and place of holding of special
meetings of the Board of Directors by mail at least 10 days before the meeting,
or by facsimile, telegram, cable, or personal service at least three days before
the meeting unless such notice requirement is waived in writing by each member.
Unless otherwise stated in the notice thereof, any and all business may be
transacted at any meeting without specification of such business in the notice.
Section 2.8 Quorum and Organization of Meetings.
-----------------------------------
A majority of the total number of members of the Board of Directors as
constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors (whether or not
adjourned from a previous meeting) there shall be less than
12
<PAGE>
a quorum present, a majority of those present may adjourn the meeting to another
time and place, and the meeting may be held as adjourned without further notice
or waiver. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, a majority of the directors present at any
meeting at which a quorum is present may decide any question brought before such
meeting. Meetings shall be presided over by the Chairman of the Board or in his
absence by such other person as the directors may select. The Board of
Directors shall keep written minutes of its meetings. The Secretary of the
Corporation shall act as secretary of the meeting, but in his absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 2.9 Indemnification.
---------------
The Corporation shall indemnify members of the Board of Directors and
officers of the Corporation and their respective heirs, personal representatives
and successors in interest for or on account of any action performed on behalf
of the Corporation, to the fullest extent permitted by the laws of the State of
Delaware and the Certificate of Incorporation, as now or hereafter in effect.
Section 2.10 Executive Committee of the Board of Directors.
---------------------------------------------
The Board of Directors, by the affirmative vote of not less than 75%
of the members of the Board of Directors then in office, may designate an
executive committee, all of whose members shall be directors, to manage and
operate the affairs of the Corporation or particular properties or enterprises
of the Corporation. Subject to the limitations of the law of the State of
Delaware and the Certificate of Incorporation, such executive committee shall
exercise all powers and authority of the Board of Directors in the management of
the business and affairs of the Corporation including, but not limited to, the
power and authority to authorize the issuance of shares of common stock in an
amount not in excess of such number of shares as shall be specifically
13
<PAGE>
authorized from time to time by the Board of Directors in respect of a
particular transaction. The executive committee shall keep minutes of its
meetings and report to the Board of Directors not less often than quarterly on
its activities and shall be responsible to the Board of Directors for the
conduct of the enterprises and affairs entrusted to it.
Section 2.11 Other Committees of the Board of Directors.
------------------------------------------
The Board of Directors may by resolution establish committees other
than an executive committee and shall specify with particularity the powers and
duties of any such committee. Subject to the limitations of the laws of the
State of Delaware and the Certificate of Incorporation, any such committee shall
exercise all powers and authority specifically granted to it by the Board of
Directors, which powers may include the authority to authorize the issuance of
shares of common stock of the Corporation in an amount not in excess of such
number of shares as shall be specifically authorized from time to time by the
Board of Directors in respect of a particular transaction. Such committees
shall serve at the pleasure of the Board; keep minutes of their meetings; and
have such names as the Board of Directors by resolution may determine and shall
be responsible to the Board of Directors for the conduct of the enterprises and
affairs entrusted to them.
Section 2.12 Committees Generally.
--------------------
The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of such committee. In the absence or disqualification of
a member of a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Each committee that
may be established by the
14
<PAGE>
Board of Directors pursuant to these Bylaws may fix its own rules and
procedures. Notice of meetings of committees, other than of regular meetings
provided for by such rules, shall be given to committee members.
Section 2.13 Directors' Compensation.
-----------------------
Directors shall receive such compensation for attendance at any
meetings of the Board and any expenses incidental to the performance of their
duties as the Board of Directors shall determine by resolution. Such
compensation may be in addition to any compensation received by the members of
the Board of Directors in any other capacity.
Section 2.14 Action Without Meeting.
----------------------
Nothing contained in these Bylaws shall be deemed to restrict the
power of members of the Board of Directors or any committee designated by the
Board to take any action required or permitted to be taken by them without a
meeting.
Section 2.15 Telephone Meetings.
------------------
Nothing contained in these Bylaws shall be deemed to restrict the
power of members of the Board of Directors, or any committee designated by the
Board of Directors, to participate in a meeting of the Board of Directors, or
committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other.
15
<PAGE>
ARTICLE III
OFFICERS
Section 3.1 Executive Officers.
------------------
The officers of the Corporation shall be a Chairman of the Board, a
President, one or more Vice Presidents, a Chief Financial Officer, a Treasurer
and a Secretary, each of whom shall be elected by the Board of Directors. The
Chairman of the Board and the President shall be elected from among the members
of the Board of Directors. The Board of Directors may elect or appoint from time
to time such other or additional officers as in its opinion are desirable for
the conduct of the business of the Corporation. Subject to Section 3.3, each
officer shall hold office until the first meeting of the Board of Directors
following the next annual meeting of stockholders following their respective
election. Any person may hold at one time two or more offices; provided,
--------
however, that the President shall not hold any other office except that of
- -------
Chairman of the Board.
Section 3.2 Powers and Duties of Officers.
-----------------------------
The Chairman of the Board shall have overall responsibility for the
management and direction of the business and affairs of the Corporation and
shall exercise such duties as customarily pertain to the office of Chairman of
the Board and such other duties as may be prescribed from time to time by the
Board of Directors. He shall be the senior officer of the Corporation and in
case of the inability or failure of the President to perform his duties, he
shall perform the duties of the President. He may appoint and terminate the
appointment or election of officers, agents, or employees other than those
appointed or elected by the Board of Directors. He may sign, execute and
deliver, in the name of the Corporation, powers of attorney, contracts, bonds
and other obligations which implement policies established by the Board of
Directors. The Chairman of the
16
<PAGE>
Board shall preside at all meetings of stockholders and of the Board of
Directors at which he is present, and shall perform such other duties as may be
prescribed from time to time by the Board of Directors or these Bylaws.
The President shall be the chief executive officer of the Corporation,
with responsibility for the active direction of the daily business of the
Corporation, and shall exercise such duties as customarily pertain to the office
of President and chief executive officer and such other duties as may be
prescribed from time to time by the Board of Directors. He may appoint and
terminate the appointment or election of officers, agents, or employees other
than those appointed or elected by the Board of Directors or the Chairman of the
Board. He may sign, execute and deliver, in the name of the Corporation, powers
of attorney, contracts, bonds and other obligations which implement policies
established by the Board of Directors. In the absence or disability of the
Chairman of the Board, the President shall perform the duties and exercise the
powers of the Chairman of the Board.
Vice Presidents shall have such powers and perform such duties as may
be assigned to them by the Chairman of the Board, the President, the executive
committee, if any, or the Board of Directors. A Vice President may sign and
execute contracts and other obligations pertaining to the regular course of his
duties which implement policies established by the Board of Directors.
The Chief Financial Officer shall be the principal financial officer
of the Corporation and shall have such powers and perform such duties as may be
assigned by the Chairman of the Board, the President, the executive committee,
if any, or the Board of Directors. The Chief Financial Officer may sign and
execute contracts and other obligations pertaining to the regular course of his
duties which implement policies established by the Board of Directors.
The Treasurer shall be the principal accounting officer of the
Corporation. Unless the Board of Directors otherwise declares by resolution, the
Treasurer shall have general custody of all the funds and securities of the
Corporation and general supervision of the collection and disbursement of funds
of the Corporation. He shall endorse for collection on behalf of the Corporation
checks, notes and other obligations, and shall deposit the same to the credit of
the
17
<PAGE>
Corporation in such bank or banks or depository as the Board of Directors may
designate. He may sign, with the Chairman of the Board, the President, or such
other person or persons as may be designated for the purpose by the Board of
Directors, all bills of exchange or promissory notes of the Corporation. He
shall enter or cause to be entered regularly in the books of the Corporation a
full and accurate account of all moneys received and paid by him on account of
the Corporation; shall at all reasonable times exhibit his books and accounts to
any director of the Corporation upon application at the office of the
Corporation during business hours; and, whenever required by the Board of
Directors or the President, shall render a statement of his accounts. He shall
perform such other duties as may be prescribed from time to time by the Board of
Directors or by these Bylaws. He may be required to give bond for the faithful
performance of his duties in such sum and with such surety as shall be approved
by the Board of Directors. Any Assistant Treasurer shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
The Secretary shall keep the minutes of all meetings of the
stockholders and of the Board of Directors. The Secretary shall cause notice to
be given of meetings of stockholders, of the Board of Directors, and of any
committee appointed by the Board of Directors. He shall have custody of the
corporate seal, minutes and records relating to the conduct and acts of the
stockholders and Board of Directors, which shall, at all reasonable times, be
open to the examination of any director. The Secretary or any Assistant
Secretary may certify the record of proceedings of the meetings of the
stockholders or of the Board of Directors or resolutions adopted at such
meetings; may sign or attest certificates, statements or reports required to be
filed with governmental
18
<PAGE>
bodies or officials; may sign acknowledgments of instruments; may give notices
of meetings; and shall perform such other duties and have such other powers as
the Board of Directors may from time to time prescribe.
Section 3.3 Resignations; Removals.
----------------------
(a) Any officer of the Corporation may resign at any time, subject
to any rights or obligations under any then existing contracts between such
officer and the Corporation, by giving written notice to the Board of Directors,
the Chairman of the Board, the President or the Secretary of the Corporation.
Any such resignation shall take effect at the time specified therein or, if the
time be not specified therein, then upon receipt thereof. The acceptance of such
resignation shall not be necessary to make it effective unless otherwise stated
therein.
(b) The Board of Directors at any meeting thereof, or by written
consent, at any time, may, to the extent permitted by law, remove with or
without cause from office or terminate the employment of any officer, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed.
(c) Any vacancy in the office of any officer through death,
resignation, removal, disqualification, or other cause may be filled at any time
by the Board of Directors or if such officer was appointed by the Chairman of
the Board or the President, then by the Chairman of the Board or the President,
as applicable.
Section 3.4 Bank Accounts.
-------------
In addition to such bank accounts as may be authorized in the usual
manner by resolution of the Board of Directors, the Treasurer, with approval of
the Chairman of the Board or the President, may authorize such bank accounts to
be opened or maintained in the name and on
19
<PAGE>
behalf of the Corporation as he may deem necessary or appropriate, provided
payments from such bank accounts are to be made upon and according to the check
of the Corporation, which may be signed jointly or singularly by either the
manual or facsimile signature or signatures of such officers or bonded employees
of the Corporation as shall be specified in the written instructions of the
Treasurer or Assistant Treasurer of the Corporation with the approval of the
Chairman of the Board or the President of the Corporation.
Section 3.5 Proxies.
-------
Unless otherwise provided in the Certificate of Incorporation or
directed by the Board of Directors, the Chairman of the Board or the President
or their designees shall have full power and authority on behalf of the
Corporation to attend and to vote upon all matters and resolutions at any
meeting of stockholders of any corporation in which this Corporation may hold
stock, and may exercise on behalf of this Corporation any and all of the rights
and powers incident to the ownership of such stock at any such meeting, whether
regular or special, and at all adjournments thereof, and shall have power and
authority to execute and deliver proxies and consents on behalf of this
Corporation in connection with the exercise by this Corporation of the rights
and powers incident to the ownership of such stock, with full power of
substitution or revocation.
ARTICLE IV
CAPITAL STOCK
Section 4.1 Stock Certificates.
------------------
Each stockholder of the Corporation shall be entitled to a certificate
certifying the series and number of shares represented thereby and in such form,
not inconsistent with the law of
20
<PAGE>
the State of Delaware or the Certificate of Incorporation of the Corporation, as
the Board of Directors may from time to time prescribe.
The certificates of stock shall be signed by the Chairman of the
Board, the President or any Vice President and by the Secretary or any Assistant
Secretary or the Treasurer or any Assistant Treasurer of the Corporation, and
sealed with the seal of the Corporation. Such seal may be a facsimile, engraved
or printed. Where any certificate is manually signed by a transfer agent or by
a registrar, the signatures of any officers upon such certificate may be
facsimiles, engraved or printed. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon any
certificate shall have ceased to be such before the certificate is issued, it
may be issued by the Corporation with the same effect as if such officer,
transfer agent or registrar had not ceased to be such at the time of its
issuance.
Section 4.2 Transfer of Shares.
------------------
(a) Shares of the capital stock of the Corporation may be
transferred on the books of the Corporation only by the holder of such shares or
by his duly authorized attorney, upon the surrender to the Corporation or its
transfer agent of the certificate representing such stock properly endorsed.
(b) The person in whose name shares of stock stand on the books of
the Corporation shall be deemed by the Corporation to be the owner thereof for
all purposes, and the Corporation shall not be bound to recognize any equitable
or other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of the State of Delaware.
21
<PAGE>
Section 4.3 Fixing Record Date.
------------------
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion, or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which record date: (a) in the case of
determination of stockholders entitled to vote at any meeting of stockholders or
adjournment thereof, shall, unless otherwise required by law, not be more than
sixty nor less than ten days before the date of such meeting; and (b) in the
case of any other action, shall not be more than sixty days prior to such other
action. If no record date is fixed: (i) the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; and (ii) the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
22
<PAGE>
Section 4.4 Lost Certificates.
-----------------
The Board of Directors or any transfer agent of the Corporation may
direct a new certificate or certificates representing stock of the Corporation
to be issued in place of any certificate or certificates theretofore issued by
the Corporation, alleged to have been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors (or any transfer agent of the Corporation
authorized to do so by a resolution of the Board of Directors) may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, or destroyed certificate or certificates, or his
legal representative, to give the Corporation a bond in such sum as the Board of
Directors (or any transfer agent so authorized) shall direct to indemnify the
Corporation against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed or
the issuance of such new certificates, and such requirement may be general or
confined to specific instances.
Section 4.5 Transfer Agent and Registrar.
----------------------------
The Board of Directors may appoint one or more transfer agents and one
or more registrars and may require all certificates for shares to bear the
manual or facsimile signature or signatures of any of them.
Section 4.6 Regulations.
-----------
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
23
<PAGE>
ARTICLE V
GENERAL PROVISIONS
Section 5.1 Offices.
-------
The Corporation shall maintain a registered office in the State of
Delaware as required by law. The Corporation may also have offices in such
other places, either within or without the State of Delaware, as the Board of
Directors may from time to time designate or as the business of the Corporation
may require.
Section 5.2 Corporate Seal.
--------------
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization, and the words "Corporate Seal" and
"Delaware."
Section 5.3 Fiscal Year.
-----------
The fiscal year of the Corporation shall be determined by resolution
of the Board of Directors.
Section 5.4 Notices and Waivers Thereof.
---------------------------
Whenever any notice whatever is required by law, the Certificate of
Incorporation, or these Bylaws to be given to any stockholder, director or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, or, in the case of directors or officers, by telegram,
cable or facsimile transmission, addressed to such address as appears on the
books of the Corporation. Any notice given by telegram, cable or facsimile
transmission shall be deemed to have been given when it shall have been
transmitted and any notice given by mail shall be deemed to have been given
three business days after it shall have been deposited in the United States mail
with postage thereon prepaid.
24
<PAGE>
Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these Bylaws, a written waiver thereof, signed by the person
entitled to such notice, whether before or after the meeting or the time stated
therein, shall be deemed equivalent in all respects to such notice to the full
extent permitted by law.
Section 5.5 Saving Clause.
-------------
These Bylaws are subject to the provisions of the Certificate of
Incorporation and applicable law. In the event any provision of these Bylaws is
inconsistent with the Certificate of Incorporation or the corporate laws of the
State of Delaware, such provision shall be invalid to the extent only of such
conflict, and such conflict shall not affect the validity of any other provision
of these Bylaws.
Section 5.6 Amendments.
----------
In furtherance and not in limitation of the powers conferred by the
laws of the State of Delaware, the Board of Directors, by action taken by the
affirmative vote of not less than 75% of the members of the Board of Directors
then in office, is hereby expressly authorized and empowered to adopt, amend or
repeal any provision of the Bylaws of this Corporation.
Subject to the rights of the holders of any series of preferred stock,
these Bylaws may be adopted, amended or repealed by the affirmative vote of the
holders of not less than 66 2/3% of the total voting power of the then
outstanding capital stock of the Corporation entitled to vote thereon; provided,
however, that this paragraph shall not apply to, and no vote of the stockholders
of the Corporation shall be required to authorize, the adoption, amendment or
repeal of any provision of the Bylaws by the Board of Directors in accordance
with the preceding paragraph.
25
<PAGE>
EXHIBIT 4.4
THIS DOCUMENT HAS BEEN REDACTED IN ACCORDANCE WITH RULE 24b-2(b) UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. A COMPLETE COPY OF THIS EXHIBIT,
WITHOUT OMISSIONS, HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
OMISSIONS ARE INDICATED HEREIN WITH [*****].
================================================================================
SATELLITE PURCHASE AGREEMENT
BY AND BETWEEN
TEMPO SATELLITE, INC.,
AND
TELESAT CANADA
DATED AS OF MAY 6, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C>
Section 1. Definitions.......................................................... 1
1.1 Affiliate....................................................... 1
1.2 Amendment No. 13................................................ 1
1.3 Amendment No. 13 Performance Specifications..................... 2
1.4 Business Day.................................................... 2
1.5 Closing......................................................... 2
1.6 Closing Date.................................................... 2
1.7 Construction Financing Agreements............................... 2
1.8 CRTC............................................................ 2
1.9 DBS............................................................. 2
1.10 Deliverable Items............................................... 2
1.11 Dollars($)...................................................... 2
1.12 Encumbrance..................................................... 2
1.13 FCC............................................................. 2
1.14 First Closing................................................... 3
1.15 First Launched Satellite........................................ 3
1.16 First Successfully Delivered Satellite.......................... 3
1.17 Force Majeure................................................... 3
1.18 Governmental Authority.......................................... 3
1.19 Canada.......................................................... 3
1.20 Industry Canada License Fee..................................... 3
1.21 Legal Requirement............................................... 3
1.22 Loral Side Agreement............................................ 3
1.23 Operating Services Agreement.................................... 3
1.24 Permitted Encumbrances.......................................... 3
1.25 Person.......................................................... 4
1.26 Primestar....................................................... 4
1.27 Purchase Price of First Successfully Delivered Satellite........ 4
1.28 Purchase Price of Second Successfully Delivered Satellite....... 5
1.29 Radio Authorization............................................. 6
1.30 Required Consents............................................... 6
1.31 Satellite Purchase Price........................................ 6
1.32 Second Closing.................................................. 6
1.33 Second Launched Satellite....................................... 6
1.34 Second Successfully Delivered Satellite......................... 6
1.35 Shipment Date................................................... 6
1.36 Successful Delivery............................................. 6
1.37 Telesat Agreements.............................................. 6
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1.38 Telesat Authorization Certificate.................................. 6
1.39 Telesat Required Consents.......................................... 7
1.40 Tempo Required Consents............................................ 7
1.41 TCI................................................................ 7
1.42 Transponder Purchase Price......................................... 7
1.43 Other Definitions.................................................. 8
Section 2. Launch of Satellites; ITU/IFRB Registration.............................. 9
2.1 Launch of Satellites............................................... 9
2.2 ITU/IFRB Registration.............................................. 9
2.3 Use of Satellite Pending Closing...................................10
Section 3. Purchase and Sale of the Satellites......................................10
3.1 Purchase and Sale of First Successfully Delivered Satellite........10
3.2 Purchase and Sale of Second Successfully Delivered Satellite.......10
3.3 Payment of Satellite Purchase Price................................11
Section 4. Issues Under BSS Construction Agreement..................................11
4.1 Pre-Shipment Inspections...........................................11
4.2 Satellite Acceptance...............................................12
4.3 Acceptance Inspection of Other Deliverable Items...................12
4.4 Amendments to BSS Construction Agreement...........................12
4.5 Successor Satellites...............................................13
Section 5. Representations and Warranties of Telesat................................13
5.1 Organization and Qualification.....................................13
5.2 Authority and Validity.............................................14
5.3 No Breach or Violation.............................................14
5.4 Legal Proceedings..................................................14
5.5 Finders and Brokers................................................15
Section 6. Representations and Warranties of Tempo..................................15
6.1 Organization.......................................................15
6.2 Authority and Validity.............................................15
6.3 No Breach or Violation.............................................15
6.4 Ownership of Satellites............................................16
6.5 Finders and Brokers................................................16
6.6 Legal Proceedings..................................................16
6.7 Construction Financing Agreement...................................16
6.8 BSS Construction Agreement.........................................16
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 7. Warranties and Limitation of Liability...................................17
7.1 Disclaimer of Warranties...........................................17
7.2 Limitation of Liability............................................17
Section 8. Additional Covenants.....................................................18
8.1 Required Consents; Industry Canada License Fees....................18
8.2 Maintenance of Required Consents...................................18
8.3 HSR Notification...................................................19
8.4 Notification of Certain Matters....................................19
8.5 Transfer Taxes.....................................................19
8.6 Updated Schedules..................................................19
8.7 Satisfaction of Conditions.........................................20
8.8 Confidentiality Regarding Terms and Existence of Agreement.........20
8.9 91 degrees Orbital Location........................................20
Section 9. Closing..................................................................21
9.1 Pre-Closing........................................................21
9.2 Closing as to First Successfully Delivered Satellite...............22
9.3 Closing as to Second Successfully Delivered Satellite..............23
9.4 Location of Closing................................................23
Section 10. Conditions to Closing....................................................23
10.1 Conditions to the Obligations of the Parties.......................23
10.2 Conditions to the Obligations of Telesat...........................24
10.3 Conditions to Obligations of Tempo.................................25
Section 11. Termination..............................................................26
11.1 Termination Prior to First Closing.................................26
11.2 Termination Following First Closing................................28
11.3 Liabilities in Event of Termination................................28
11.4 Procedure Upon Termination.........................................29
Section 12. Survival of Covenants, Representations and Warranties; Indemnification...29
12.1 Survival of Covenants, Representations an Warrantie After Closing..29
12.2 Indemnification by Telesat.........................................29
12.3 Indemnification by Tempo...........................................29
12.4 Third Party Claims.................................................30
12.5 Limitations on Certain Indemnification Obligations - Telesat.......31
12.6 Limitations on Certain Indemnification Obligations - Tempo.........31
</TABLE>
(iii)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 13. Miscellaneous............................................................31
13.1 Parties Obligated and Benefited...................................31
13.2 Notices...........................................................32
13.3 Attorneys' Fees...................................................33
13.4 Right to Specific Performance.....................................33
13.5 Waiver............................................................33
13.6 Captions..........................................................33
13.7 Choice of Law.....................................................33
13.8 Terms.............................................................34
13.9 Rights Cumulative.................................................34
13.10 Further Actions...................................................34
13.11 Time..............................................................34
13.12 Counterparts......................................................34
13.13 Entire Agreement..................................................34
13.14 Severability......................................................34
13.15 Construction......................................................35
13.16 Expenses..........................................................35
13.17 Waiver of Tax Warranties..........................................35
13.18 Characterization of this Transaction..............................35
</TABLE>
(v)
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
EXHIBITS
- --------
A - Amendment No. 13 to BSS Construction Agreement
B - Assignment Agreement
C - 91 degrees Term Sheet
D - Loral Side Agreement
SCHEDULES
- ---------
1 - Telesat Required Consents
2 - Tempo Required Consents
3 - Telesat Proceedings and Judgments
4 - Tempo Proceedings and Judgments
5 - Conflicts
(v)
<PAGE>
SATELLITE PURCHASE AGREEMENT
----------------------------
This Satellite Purchase Agreement (this "Agreement") is made as of
the 6th day of May, 1996, by and between Tempo Satellite, Inc., an Oklahoma
corporation ("Tempo"), on the one hand, and Telesat Canada, a corporation
continued and existing under the laws of Canada ("Telesat"), on the other (each
of Tempo and Telesat being referred to individually as a "Party" and
collectively as the "Parties").
RECITALS
--------
A. Tempo has entered into Contract No. TPO-1-290 as amended and
restated in its entirety by Contract Amendment No. 4, as further amended by
Amendments No. 5 through No. 13 and any other amendments hereafter entered into
(Amendments No. 5 through No. 13 and any additional amendments being separately
referred to herein from time to time as the "Amendments," and, together with
Contract Amendment No. 4, as the "BSS Construction Agreement") with Space
Systems/Loral, Inc. ("Loral"), which agreement provides for the construction,
launch and deployment of two satellites which together will contain transponder
capacity appropriate for the broadcast of 32 channels at the 82 degrees West
orbital location (each, a "Satellite" and together, the "Satellites").
B. Tempo and Telesat desire to enter in this Agreement to
provide for the sale of the Satellites to Telesat.
AGREEMENT
---------
In consideration of the above recitals and the mutual agreements
stated in this Agreement, the Parties agree as follows:
SECTION 1. DEFINITIONS.
In addition to terms defined elsewhere in this Agreement, the
following terms with initial capital letters, when used in this Agreement, will
have the meanings set forth below:
1.1 Affiliate. With respect to any Person, any other Person
---------
controlling, controlled by, or under common control with, such Person, with
"control" for such purpose meaning the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities or voting interests,
by contract or otherwise.
1.2 Amendment No. 13. Amendment No. 13 to the BSS Construction
----------------
Agreement, attached hereto as EXHIBIT A.
-1-
<PAGE>
1.3 Amendment No. 13 Performance Specifications. The performance
-------------------------------------------
specifications of the Satellites for the 82 degrees West orbital location, as
such performance specifications are defined in Amendment No. 13.
1.4 Business Day. Any day other than Saturday, Sunday or a day on
------------
which banking institutions in Toronto, Ontario, or Denver, Colorado are required
or authorized to be closed.
1.5 Closing. The First Closing and/or the Second Closing, as
-------
applicable.
1.6 Closing Date. The First Closing Date and/or the Second
-------------
Closing Date, as application.
1.7 Construction Financing Agreements. (a) Credit Agreement dated
---------------------------------
as of March 9, 1994 among Primestar, The Bank of New York, Chemical Bank and
Citibank, N.A., as Managing Agent, the Bank of New York as Documentation Agent,
Chemical Bank as Administrative Agent and the Banks signatory thereto, as
amended or extended and (b) any other credit facility or arrangement the
proceeds of which are used to finance or refinance the payment of any item
included in the Satellite Purchase Price, including any third-party replacement
or supplemental credit facility to the credit agreement referred to in paragraph
(a) and including any internal financing arrangement which is at rates and on
terms no less favorable to the borrower than those contained in either the
credit agreement referred to in paragraph (a) or in any third-party replacement
or supplemental credit agreement to the credit agreement referred to in
paragraph (a).
1.8 CRTC. Canadian Radio-television and Telecommunications
----
Commission.
1.9 DBS. Direct Broadcast Service.
---
1.10 Deliverable Items. As defined in the BSS Construction
-----------------
Agreement; provided, that Deliverable Items for purposes of this Agreement does
not include the Satellites or any additional satellites ordered or deliverable
under the BSS Construction Agreement.
1.11 Dollars($). All references in this Agreement to "Dollars" or
----------
"$" shall be deemed to be references to United States dollars.
1.12 Encumbrance. Any mortgage, lien, security interest, security
-----------
agreement, conditional sale or other title retention agreement, limitation,
pledge, option, charge, assessment, restrictive agreement, restriction,
encumbrance, adverse interest, restriction on transfer or any exception to or
defect in title or other ownership interest (including reservations, rights of
way, possibilities of reverter, restrictive covenants, leases and licenses).
1.13 FCC. The Federal Communications Commission.
---
-2-
<PAGE>
1.14 First Closing. The consummation of the transactions
-------------
contemplated by Section 3.1, the date of which is referred to as the First
Closing Date.
1.15 First Launched Satellite. The first satellite that Loral
------------------------
attempts to launch under the BSS Construction Agreement, whether or not
Successfully Delivered.
1.16 First Successfully Delivered Satellite. The first Satellite
--------------------------------------
launched pursuant to the BSS Construction Agreement which is accepted by Tempo
pursuant to Section 10.2 or Section 10.3 of the BSS Construction Agreement,
including, if applicable, a replacement Satellite as contemplated by Section
10.4 of the BSS Construction Agreement.
1.17 Force Majeure. Acts of God; meteors; fire, flood, weather, or
-------------
other catastrophes; other circumstances in the space environment over which the
parties have no control; Legal Requirements arising after the date of this
Agreement; national emergencies, insurrections, riots, wars, or strikes,
lockouts, work stoppages or other labor difficulties.
1.18 Governmental Authority. (i) The United States of America,
----------------------
(ii) Canada, (iii) any state, commonwealth, territory, province or possession of
the United States of America or of Canada and any political subdivision thereof
(including counties, municipalities and the like), (iv) any foreign (as to the
United States of America or Canada) sovereign entity and any political
subdivision thereof or (v) any agency, authority or instrumentality of any of
the foregoing, including any court, tribunal, department, bureau, commission or
board.
1.19 Industry Canada. A department of the Federal Government of
---------------
Canada which has, among other things, the responsibility for assigning the
Canadian orbital slots.
1.20 Industry Canada License Fee. The annual license fee payable
---------------------------
to Industry Canada for use of the 82degrees West orbital location for
two Satellites.
1.21 Legal Requirement. Any applicable statute, ordinance, code,
-----------------
law, rule, regulation, order or other requirement, standard or procedure, in
each case to the extent having the force of law, enacted, adopted or applied by
any Governmental Authority, including judicial decisions applying common law or
interpreting any other Legal Requirement.
1.22 Loral Side Agreement. The memorandum of agreement to be
--------------------
entered into among Tempo, Loral and Telesat, as amended or extended.
1.23 Operating Services Agreement. The operating services
----------------------------
agreement between Telesat and TCI dated of even date herewith, as amended or
extended.
1.24 Permitted Encumbrances. Rights reserved to any Governmental
----------------------
Authority to regulate the Satellites.
-3-
<PAGE>
1.25 Person. Any natural person, corporation, partnership, trust,
------
unincorporated organization, association, limited liability company,
Governmental Authority or other entity.
1.26 Primestar. Primestar Partners, L.P., a Delaware limited
---------
partnership.
1.27 Purchase Price of First Successfully Delivered Satellite. An
--------------------------------------------------------
amount equal to the aggregate of the following:
(a) all amounts paid or payable to Loral under the BSS
Construction Agreement with respect to (i) the First Successfully Delivered
Satellite (which shall include 50% of any amounts paid or payable under the
Amendments and 50% of any other amounts paid or payable under the BSS
Construction Agreement which are not attributable to a specific Satellite)
[*****] payable under Article 13 of the BSS Construction Agreement) and (ii)
Items 3 and 4 described in Section 4.1 of the BSS Construction Agreement;
(b) all amounts paid or payable under the Telesat
Agreements with respect to the period up to and including the date that is 10
days prior to the First Closing Date;
(c) 50% of interest charges and other financing costs paid
or payable by Tempo, Primestar or their respective Affiliates under the
Construction Financing Agreements with respect to the period up to and including
the date that is 10 days prior to First Closing Date; and
(d) [*****], representing amounts paid by Tempo,
Primestar or their respective Affiliates to Loral prior to execution of the BSS
Construction Agreement in connection with the Satellites;
less
(i) the amount of any damages paid to
Tempo,primestar or their respective Affiliates by Loral pursuant to Article 23
of the BSS Construction Agreement in respect of the First Successfully
Delivered Satellite;
(ii) the amount of any [*****] of the BSS
Construction Agreement in respect of the First Successfully Delivered Satellite
prior to the First Closing Date;
(iii) the amount of any reimbursement by Loral to
Tempo, Primestar or their respective Affiliates pursuant to Article 21 of the
BSS Construction Agreement in respect of the First Successfully Delivered
Satellite; provided, that no reduction shall be made
-4-
<PAGE>
in respect of any payment by Loral for alternative satellite facilities acquired
by Tempo as a result of a delay in Satellite delivery; and
(iv) any late payment or interest charges and any
other amounts paid by Tempo, Primestar or their respective Affiliates under
either the BSS Construction Agreement or any Construction Financing Agreement as
a result of a default under any such agreement.
1.28 Purchase Price of Second Successfully Delivered Satellite. An
---------------------------------------------------------
amount equal to the aggregate of the following:
(a) all amounts paid or payable to Loral under the BSS
Construction Agreement (after reducing such amount by the amount of any
reduction in the Orbital Performance Incentives payable under Article 13 of the
BSS Construction Agreement);
(b) all amounts paid or payable to Telesat under the
Telesat Agreements; and
(c) all interest charges and other financing costs paid or
payable by Tempo, Primestar or their respective Affiliates under the
Construction Financing Agreements;
in each case to the extent not previously paid by Telesat as part of the
Purchase Price of First Successfully Delivered Satellite;
less
(i) the amount of any damages paid to Tempo,
Primestar or their respective Affiliates by Loral pursuant to Article 23 of the
BSS Construction Agreement;
(ii) the amount of any [**************************]
of the BSS Construction Agreement in respect of the Second
Successfully Delivered Satellite prior to the Second Closing Date;
(iii) the amount of any reimbursement by Loral to
Tempo, Primestar or their respective Affiliates pursuant to Article 21 of the
BSS Construction Agreement; provided, that no reduction shall be made in respect
of any payment by Loral for alternative satellite facilities acquired by Tempo
as a result of a delay in Satellite delivery; and
(iv) any late payment or interest charges and any
other amounts paid by Tempo, Primestar or their respective Affiliates under
either the BSS Construction Agreement or any Construction Financing Agreement as
a result of a default under any such agreement;
-5-
<PAGE>
in each case to the extent not applied in reduction of part of the Purchase
Price of First Successfully Delivered Satellite.
1.29 Radio Authorization. The authorization of the Minister of
-------------------
Industry (Canada) pursuant to the Radiocommunication Act (Canada) to use the
broadcast satellite system position at the 82degrees West orbital location.
1.30 Required Consents. The Telesat Required Consents and the
-----------------
Tempo Required Consents.
1.31 Satellite Purchase Price. The Purchase Price of First
------------------------
Successfully Delivered Satellite or the Purchase Price of Second Successfully
Delivered Satellite, as applicable.
1.32 Second Closing. The consummation of the transactions
--------------
contemplated by Section 3.2, the date of which is referred to as the Second
Closing Date.
1.33 Second Launched Satellite. The second satellite that Loral
-------------------------
attempts to launch under the BSS Construction Agreement, whether or not
Successfully Delivered.
1.34 Second Successfully Delivered Satellite. The second Satellite
---------------------------------------
launched pursuant to the BSS Construction Agreement which is accepted by Tempo
pursuant to Section 10.2 or Section 10.3 of the BSS Construction Agreement,
including, if applicable, a replacement Satellite as contemplated by Section
10.4 of the BSS Construction Agreement.
1.35 Shipment Date. The date on which Loral ships a Satellite to
-------------
its Launch Site (as defined in the BSS Construction Agreement).
1.36 Successful Delivery. A Satellite has been launched and
-------------------
accepted by Tempo pursuant to Section 10.2 or Section 10.3 of the BSS
Construction Agreement.
1.37 Telesat Agreements. The following agreements between Telesat
------------------
and Tempo: (a) Consulting Agreement dated as of November 16, 1990, and amended
as of June 1, 1991 and September 28, 1992, (b) Technical Assistance Agreement
dated as of December 31, 1992 and (c) Consulting Agreement dated as of August
12, 1993.
1.38 Telesat Authorization Certificate. A certificate of Telesat
---------------------------------
in form and substance satisfactory to Tempo certifying that as of the date of
delivery of such certificate, Telesat has full and unconditional authority
under applicable Legal Requirements to authorize Loral to launch the Satellites
into the 82 degrees West orbital location, to thereafter own and operate the
Satellites at such location in accordance with the terms of this Agreement and
the Operating Services Agreement, and to permit the use by TCI of the
transponders to be sold to it in accordance with the terms of, and for the
purposes contemplated by, the Operating Services
-6-
<PAGE>
Agreement. If Tempo in its sole discretion hereafter agrees in writing to the
delivery by Telesat of a certificate pursuant to Section 9.1.2 or Section 10.3.6
that contains certifications different than those set forth in the immediately
preceding sentence, the form of such certificate as agreed to by Tempo shall
thereafter be the Telesat Authorization Certificate.
1.39 Telesat Required Consents. All notifications, licenses,
-------------------------
permits, authorizations, approvals and consents under Legal Requirements and
other third-party consents (including, without limiting the generality of the
foregoing, any Industry Canada and CRTC requirements, notifications, licenses,
authorizations, approvals and or consents) required for Telesat to consummate
the transactions contemplated by, and to perform its obligations under, this
Agreement and the Operating Services Agreement, including those required for (a)
Telesat to perform its obligations under Section 2 of this Agreement and to
permit the transactions described in Section 2 of the Operating Services
Agreement, (b) Telesat to purchase the Satellites and to thereafter own and
operate the Satellites at the 82degrees West orbital location, and (c) Telesat
to sell transponders on the Satellites to TCI in accordance with the terms of
the Operating Services Agreement and TCI to purchase and use such transponders
under Canadian Legal Requirements to transmit television programming and other
services into the United States; provided, that any notifications, licenses,
permits, authorizations, approvals and consents required under United States
Legal Requirements for TCI to so purchase and use such transponders are Tempo
Required Consents, not Telesat Required Consents.
1.40 Tempo Required Consents. All notifications, licenses,
-----------------------
permits, authorizations, approvals and consents under Legal Requirements and
other third-party consents (including, without limiting the generality of the
foregoing, any FCC requirements, notifications, licenses, authorizations,
approvals and or consents) required for Tempo to consummate the transactions
contemplated by, and to perform its obligations under, this Agreement and for
TCI to consummate the transactions contemplated by, and to perform its
obligations under, the Operating Services Agreement, including those required
for (a) Tempo to sell the Satellites to Telesat, and (b) TCI to purchase
transponders on the Satellites in accordance with the terms of the Operating
Services Agreement and to use such transponders to transmit television
programming and other services into the United States; provided, that any
notifications, licenses, permits, authorizations, approvals and consents
required under Canadian Legal Requirements for TCI to so purchase and use such
transponders are Telesat Required Consents, not Tempo Required Consents.
1.41 TCI. TCI Technology Ventures, Inc., a corporation
---
incorporated and existing under the laws of the State of Delaware.
1.42 Transponder Purchase Price.
--------------------------
(a) Subject to Sections 1.42(b) and (c), the
Transponder Purchase Price for each Satellite will be an amount equal to:
-7-
<PAGE>
Satellite Purchase Price of such Satellite x 27
------------------------------------------ --
2 32
(b) If the First Successfully Delivered Satellite is being
operated in the 16 transponder mode at the time it is sold to Telesat, the
Transponder Purchase Price in respect of the First Successfully Delivered
Satellite will be an amount equal to:
Purchase Price of First Successfully Delivered Satellite x 14
-------------------------------------------------------- --
2 16
(c) If the First Successfully Delivered Satellite is being
operated in the 16 transponder mode at the time the Second Successfully
Delivered Satellite is sold to Telesat pursuant to Section 3.2, the Transponder
Purchase Price in respect of the Second Successfully Delivered Satellite will be
an amount equal to:
Purchase Price of Second Successfully Delivered Satellite x 13
--------------------------------------------------------- --
2 16
1.43 Other Definitions. The following terms are defined in the Sections
-----------------
indicated:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Action 12.4
Agreement Preamble
Amendments Recitals
Anniversary Date 11.1(d)
Article 9 4.1
Article 10 4.1
Article 11 4.3
Article 33 Notice 4.5
Article 33 Option 4.5
Assignment Agreement 3.1
BSS Construction Agreement Recitals
HSR Act 8.3
Indemnified Party 12.4
Indemnifying Party 12.4
In-Orbit Testing 2.1(b)
Loral Recitals
Party or Parties Preamble
Pre-Closing 9.1
Satellite or Satellites Recitals
</TABLE>
-8-
<PAGE>
Second Anniversary Date 11.2(c)
Telesat Preamble
Telesat Damages 12.6
Telesat Indemnitees 12.3
Tempo Preamble
Tempo Damages 12.5
Tempo Indemnitees 12.2
Term Sheet 8.9
TT&C Ground Station Equipment 4.3
Two-Channel Transponder Simulator 3.1
SECTION 2. LAUNCH OF SATELLITES; ITU/IFRB REGISTRATION.
2.1 Launch of Satellites.
--------------------
(a) Telesat agrees that Loral may launch the Satellites
into the 82DEGREES West orbital location at any time after the Telesat Required
Consents have been obtained and Telesat has delivered to Tempo the Telesat
Authorization Certificate.
(b) Tempo agrees that it remains responsible under the BSS
Construction Agreement (i) to give Loral access to Tempo's communications uplink
facility in the United States for the purposes of In-Orbit Testing (as defined
in the BSS Construction Agreement) of the First Launched Satellite and the
Second Launched Satellite, (ii) at least 60 days prior to the launch of the
First Launched Satellite and the Second Launched Satellite, to supply at Tempo's
communications uplink facility in the United States, the radio frequency
equipment identified in Attachment F to the BSS Construction Agreement as being
provided by Tempo and (iii) to meet with Loral at least 180 days prior to launch
of the First Launched Satellite and the Second Launched Satellite to confirm the
availability of the radio frequency equipment which Tempo is obligated to
provide.
(c) With respect to any Satellites launched under the BSS
Construction Agreement after the First Launched Satellite and the Second
Launched Satellite, Telesat agrees (i) that it will give Loral access to
Telesat's communications uplink facility for the purposes of In-Orbit Testing
(as defined in the BSS Construction Agreement) of each such Satellite, (ii) at
least 60 days prior to the launch of each such Satellite, to supply at the
communications uplink facility at its cost, the radio frequency equipment
identified in Attachment F to the BSS Construction Agreement as being provided
by Tempo and (iii) to meet with Loral at least 180 days prior to launch of each
such Satellite to confirm the availability of the radio frequency equipment
which Telesat is obligated to provide.
2.2 ITU/IFRB Registration. Telesat is responsible for supporting
---------------------
Industry Canada with radio frequencies coordination and the preparation of
filings for International Telecommunications Union/International Frequency
Registration Board (ITU/IFRB) registration
-9-
<PAGE>
with respect to the Satellites. Telesat will submit all such ITU/IFRB filings to
Tempo reasonably in advance of making such filings with Industry Canada for
Tempo's review and comment and will not make any such filings without Tempo's
written consent to the contents of such filings; provided that Tempo shall
confirm in writing the giving or denial of the consent to the contents of such
filing within three Business Days of the receipt thereof. If Tempo shall not
have given or denied such consent within such three Business Day period, Tempo
shall be deemed to have consented to the contents of such filing. If Tempo
shall deny such consent within such period, it shall specify with reasonable
particularity the reasons for such denial. If any ITU/IFRB filing with respect
to the Satellites contains modifications from the nominal plan (filed with the
ITU/IFRB) that alter the in-orbit Performance Specifications (including the
Amendment No. 13 Performance Specifications) of the Satellites, the Performance
Specifications (including the Amendment No. 13 Performance Specifications) will
be adjusted to take into account the deviations from the nominal plan for the
purposes of applying the Performance Specifications (including the Amendment No.
13 Performance Specifications) under this Agreement.[*****]
2.3 Use of Satellite Pending Closing. Tempo acknowledges and
--------------------------------
agrees to the provisions of Sections 2.2 and 2.4 of the Operating Services
Agreement with respect to the use of the Satellites pending Closing.
SECTION 3. PURCHASE AND SALE OF THE SATELLITES.
Subject to the terms and conditions set forth in this Agreement,
the Parties will effect the purchase and sale of the Satellites and the
Deliverable Items as follows:
3.1 Purchase and Sale of First Successfully Delivered Satellite.
-----------------------------------------------------------
In consideration of, and in exchange for, payment by Telesat of the Purchase
Price of First Successfully Delivered Satellite, Tempo will sell, convey, assign
and transfer to Telesat on the First Closing Date, all of Tempo's right, title
and interest in, to and under the First Successfully Delivered Satellite and the
Deliverable Items transferred to it by Loral on or before the First Closing Date
other than the Two-Channel Transponder Simulator identified as Item 3 in Section
4.1 of the BSS Construction Agreement (the "Two-Channel Transponder Simulator"),
free and clear of all Encumbrances, except Permitted Encumbrances, such
assignment to be effected pursuant to an Assignment Agreement in the form
attached to this Agreement as EXHIBIT B (the "Assignment Agreement"). Tempo is
not assigning to Telesat any of its rights or obligations under the Construction
Financing Agreements or the BSS Construction Agreement except to the extent
certain rights of Tempo under the BSS Construction Agreement are extended or
assigned to Telesat pursuant to the Loral Side Agreement.
3.2 Purchase and Sale of Second Successfully Delivered Satellite.
------------------------------------------------------------
If the BSS Construction Agreement continues in effect following the First
Closing Date, on the Second Closing Date Tempo will sell, convey, assign and
transfer to Telesat in consideration of and in
-10-
<PAGE>
exchange for, payment by Telesat of the Purchase Price of Second Successfully
Delivered Satellite, all of Tempo's right, title and interest in, to and under
the Second Successfully Delivered Satellite and the Deliverable Items
transferred to it by Loral on or before such Second Closing Date and not
previously assigned to Telesat pursuant to Section 3.1, free and clear of all
Encumbrances, except Permitted Encumbrances, such assignment to be effected
pursuant to an Assignment Agreement.
3.3 Payment of Satellite Purchase Price. Telesat will pay to
-----------------------------------
Tempo by wire transfer of immediately available funds on the First Closing Date
and, if applicable, on the Second Closing Date, an amount equal to the Satellite
Purchase Price for the Satellite being sold to Telesat on such date minus the
Transponder Purchase Price for the Transponders being sold to TCI on such date.
Tempo hereby agrees that on each Closing Date, Telesat may offset an amount of
the Satellite Purchase Price equal to, and against, the amount of the
Transponder Purchase Price payable by TCI to Telesat on such Closing Date and
Telesat hereby agrees that TCI may offset the amount of the Transponder Purchase
Price payable by TCI to Telesat on such Closing Date against an equal amount of
the Satellite Purchase Price payable by Telesat to Tempo on such date.
SECTION 4. ISSUES UNDER BSS CONSTRUCTION AGREEMENT.
4.1 Pre-Shipment Inspections. Pursuant to Article 9 of the BSS
------------------------
Construction Agreement ("Article 9"), Tempo has certain rights with respect to
pre-shipment inspection of the Satellites and the Deliverable Items. Tempo
agrees to allow Telesat to be present at all pre-shipment inspections which
occur after the date of this Agreement and to consult in good faith with Telesat
regarding the content of any notices, waivers, reports or other communications
to be delivered to Loral pursuant to Article 9; provided, that Tempo shall
retain final authority with respect to all decisions and communications to be
made under Article 9 and Telesat's approval shall not be required with respect
to any such decisions or communications other than with respect to any waiver
under the BSS Construction Agreement that (i) would have a material adverse
effect on achieving a mission life of at least 12 years and 100% of the
transponders and payload and bus redundancy availability; (ii) would cause an
adverse deviation from the Amendment No. 13 Performance Specifications for
sidelobe isolation, antenna beam pointing accuracy, attitude control, tracking,
telemetry and command requirements that would materially impair Telesat's
ability to operate the Satellites or impair Telesat's ability to operate the
Satellites within the limits of the Legal Requirements and Required Consents; or
(iii) would cause a material adverse deviation from the Amendment No. 13
Performance Specifications for saturation flux density operating in both the
automatic level control and fixed gain modes, antenna cross-polarization
isolation, spurious outputs, multipaction and passive intermodulation products,
and EIRP and G/T polygons and city tables, all to the extent that such
deviations from the Amendment No. 13 Performance Specifications would prevent
Telesat, pursuant to Section 3 of the Operating Services Agreement, from
designating five transponders that meet the Amendment No. 13 Performance
Specifications as Telesat Transponders, were the Satellites to be accepted
pursuant to Article 10 of the BSS Construction Agreement ("Article 10").
-11-
<PAGE>
4.2 Satellite Acceptance. Pursuant to Article 10, Tempo has
--------------------
certain rights with respect to acceptance of the Satellites. Tempo agrees to
allow Telesat to be present at In-Orbit Testing of the Satellites and at
acceptance review sessions with respect to the Satellites and to consult in good
faith with Telesat regarding the content of any notices, waivers, reports or
other communications to be delivered to Loral pursuant to Article 10; provided,
that Tempo shall retain final authority with respect to all decisions and
communications to be made under Article 10 and Telesat's approval shall not be
required with respect to any such decisions or communications other than with
respect to any waiver under the BSS Construction Agreement that (i) would have a
material adverse effect on achieving a mission life of at least six years and
50% of the transponders and payload and bus redundancy availability; (ii) would
cause an adverse deviation from the Amendment No. 13 Performance Specifications
for sidelobe isolation, antenna beam pointing accuracy, attitude control,
tracking, telemetry and command requirements that would materially impair
Telesat's ability to operate the Satellites or impair Telesat's ability to
operate the Satellites within the limits of the Legal Requirements and Required
Consents; or (iii) would cause a material adverse deviation from the Amendment
No. 13 Performance Specifications for saturation flux density operating in both
the automatic level control and fixed gain modes, antenna cross-polarization
isolation, spurious outputs, multipaction and passive intermodulation products,
and EIRP and G/T polygons and city tables, all to the extent that such
deviations from the Amendment No. 13 Performance Specifications would prevent
Telesat, pursuant to Section 3 of the Operating Services Agreement, from
designating five transponders that meet the Amendment No. 13 Performance
Specifications as Telesat Transponders, were the Satellites to be accepted
pursuant to Article 10.
4.3 Acceptance Inspection of Other Deliverable Items. Pursuant to
------------------------------------------------
Article 11 of the BSS Construction Agreement ("Article 11"), Tempo has certain
rights with respect to acceptance inspection for the Deliverable Items. Tempo
agrees to allow Telesat to be present at all inspections and acceptance review
sessions with respect to the Deliverable Items which occur after the date of
this Agreement and to consult with Telesat regarding the content of any notices,
waivers, reports or other communications to be delivered to Loral pursuant to
Article 11; provided, that, except with respect to TT&C Ground Station Equipment
(as defined in the BSS Construction Agreement and as to which Telesat shall have
final authority), Tempo shall retain final authority with respect to all
decisions and communications to be made under Article 11 and Telesat's approval
shall not be required with respect to any such decisions or communications.
4.4 Amendments to BSS Construction Agreement. Tempo agrees that
----------------------------------------
it will not amend the BSS Construction Agreement without the prior written
consent of Telesat if such amendment (i) would have a material adverse effect on
achieving a mission life of at least 12 years and 100% of the transponders and
payload and bus redundancy availability; (ii) would cause an adverse deviation
from the Amendment No. 13 Performance Specifications for sidelobe isolation,
antenna beam pointing accuracy, attitude control, tracking, telemetry and
command requirements that would materially impair Telesat's ability to operate
the Satellites or impair Telesat's ability to operate the Satellites within the
limits of the Legal Requirements and Required Consents; or (iii) would cause a
material adverse deviation from the Amendment No.
-12-
<PAGE>
13 Performance Specifications for saturation flux density operating in both the
automatic level control and fixed gain modes, antenna cross-polarization
isolation, spurious outputs, multipaction and passive intermodulation products,
and EIRP and G/T polygons and city tables, all to the extent that such
deviations from the Amendment No. 13 Performance Specifications would prevent
Telesat, pursuant to Section 3 of the Operating Services Agreement, from
designating five transponders that meet the Amendment No. 13 Performance
Specifications as Telesat Transponders, were the Satellites to be accepted
pursuant to Article 10 of the BSS Construction Agreement. Tempo agrees that it
will deliver a copy of each Amendment to the BSS Construction Agreement entered
into after the date hereof to Telesat.
4.5 Successor Satellites. Pursuant to Article 33 of the BSS
--------------------
Construction Agreement, Tempo has the option (the "Article 33 Option") to
terminate the BSS Construction Agreement in the event of two successive
satellite failures thereunder. If Tempo desires to exercise the Article 33
Option, it shall give prompt written notice (the "Article 33 Notice") to Telesat
regarding its decision prior to its exercise of such option. Telesat shall then
have the option to cause Tempo not to exercise the Article 33 Option and instead
to cause Loral to build a replacement satellite in accordance with the terms of
the BSS Construction Agreement. The option granted to Telesat in this Section
4.5 must be exercised by written notice to Tempo given within five Business Days
following Tempo's giving of the Article 33 Notice and the exercise of such
option must be accompanied by [*****] for one Satellite if the Article 33
Option becomes exercisable after one Satellite has been Successfully Delivered
or for two Satellites if the Article 33 Option becomes exercisable before
Successful Delivery of any Satellite, in each case to the extent already paid by
Tempo. Following exercise by Telesat of the option granted to it in this Section
4.5, this Agreement and the Operating Services Agreement shall continue in
effect.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF TELESAT.
To induce Tempo to enter into this Agreement, Telesat represents
and warrants to Tempo, as of the date of this Agreement and as of the First and
Second Closing Dates with respect to each Satellite, except with respect to
representations and warranties made as of a specific date, as follows:
5.1 Organization and Qualification. Telesat is a corporation,
------------------------------
validly existing and in good standing under the laws of Canada and has all
requisite corporate power and authority to carry on its business as currently
conducted and to own, lease, use and operate its assets, except where the
failure to have such power and authority would not have a material adverse
effect on Telesat or its ability to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement. Telesat has
delivered to Tempo complete and correct copies of the Articles of Continuance
and Bylaws of Telesat, which Articles of Continuance and Bylaws have not been
amended, modified or rescinded and are in full force and effect.
-13-
<PAGE>
5.2 Authority and Validity. Subject to obtaining the approval
----------------------
of the board of directors of Telesat, Telesat has all requisite corporate power
and authority to execute and deliver, to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement. Subject to
obtaining the consent of Telesat's board of directors, the execution and
delivery by Telesat of, the performance by Telesat of its obligations under, and
the consummation by Telesat of the transactions contemplated by, this Agreement
have been duly authorized by all requisite corporate action of Telesat. Telesat
will deliver to Tempo on or before May 27, 1996, complete and correct copies of
resolutions, certified by Telesat's secretary, authorizing such execution,
delivery, performance and consummation, which have been duly adopted by
Telesat's board of directors, and which have not been amended, modified or
rescinded and are in full force and effect. Subject to obtaining the approval
of the board of directors of Telesat, this Agreement has been duly executed and
delivered by Telesat and is the valid and binding obligation of Telesat,
enforceable against Telesat in accordance with its terms, except insofar as
enforceability may be affected by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect affecting
creditors' rights generally or by principles governing the availability of
equitable remedies.
5.3 No Breach or Violation. Subject to obtaining the Telesat
----------------------
Required Consents, including those listed on SCHEDULE 1, the execution, delivery
and performance of this Agreement by Telesat will not: (a) violate any
provision of the Articles of Continuance or Bylaws of Telesat; (b) violate any
Legal Requirement; (c) require any consent, approval or authorization of, or any
filing with or notice to, any Person; or (d) (i) violate, conflict with or
constitute a breach of or default under (without regard to requirements of
notice, passage of time or elections of any Person), (ii) permit or result in
the termination, suspension or modification of, (iii) result in the acceleration
of (or give any Person the right to accelerate) the performance of Telesat
under, or (iv) result in the creation or imposition of any Encumbrance under,
any instrument or other agreement to which Telesat is a party or by which
Telesat or any of its assets is bound or affected, except for purposes of
clauses (b) or (d) such violations, conflicts, breaches, defaults, terminations,
suspensions, modifications and accelerations as would not, individually or in
the aggregate, have a material adverse effect on the ability of Telesat to
perform its obligations under this Agreement. SCHEDULE 1 lists all Telesat
Required Consents of which Telesat is aware as of the date of this Agreement.
5.4 Legal Proceedings. Except as set forth on SCHEDULE 3, except
-----------------
as may affect the DBS industry generally, and except with respect to any filings
made with the CRTC or Industry Canada opposing Telesat's applications for CRTC
authorization of the transactions contemplated by this Agreement and for a Radio
Authorization for the 82 degrees West orbital location, there is no judgment or
order outstanding, or any action, suit, complaint, proceeding or investigation
by or before any Governmental Authority or any arbitrator pending against
Telesat or its assets, or to Telesat's best knowledge, threatened against
Telesat or its assets, which, if adversely determined, would be reasonably
expected to have a material adverse effect on the ability of Telesat to
consummate the transactions contemplated by this Agreement or the Operating
Services Agreement.
-14-
<PAGE>
5.5 Finders and Brokers. Neither Telesat nor any of its
-------------------
Affiliates has employed any financial advisor, broker or finder or incurred any
liability for any financial advisory, brokerage, finder's or similar fee or
commission in connection with the transactions contemplated by this Agreement or
the Operating Services Agreement for which Tempo or any of its Affiliates could
be liable.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF TEMPO.
To induce Telesat to enter into this Agreement, Tempo represents
and warrants to Telesat, as of the date of this Agreement and as of the First
and Second Closing Dates, except representations and warranties made as of a
specific date as follows:
6.1 Organization. Tempo is a corporation duly organized, validly
------------
existing and in good standing under the laws of its state of incorporation and
has all requisite corporate power and authority to carry on its business as
currently conducted and to own, lease, use and operate its assets, except where
the failure to have such power and authority would not have a material adverse
effect on Tempo. Tempo has delivered to Telesat complete and correct copies of
the Articles or Certificate of Incorporation and Bylaws of Tempo, which Articles
or Certificate of Incorporation and Bylaws have not been amended, modified or
rescinded and are in full force and effect.
6.2 Authority and Validity. Subject to obtaining the approval of
----------------------
the board of directors of Tempo, Tempo has all requisite corporate power and
authority to execute and deliver, to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement. Subject to
obtaining the approval of the board of directors of Tempo, the execution and
delivery by Tempo of, the performance by Tempo of its obligations under, and the
consummation by Tempo of the transactions contemplated by, this Agreement have
been duly authorized by all requisite corporate action of Tempo. Tempo will
deliver to Telesat on or before May 27, 1996, complete and correct copies of
resolutions, certified by Tempo's secretary, authorizing such execution,
delivery, performance and consummation, which have been duly adopted by Tempo's
board of directors and which have not been amended, modified or rescinded and
are in full force and effect. Subject to obtaining the approval of the board of
directors of Tempo, this Agreement has been duly executed and delivered by Tempo
and is the valid and binding obligation of Tempo, enforceable against Tempo in
accordance with its terms, except insofar as enforceability may be affected by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
now or hereafter in effect affecting creditors' rights generally or by
principles governing the availability of equitable remedies
6.3 No Breach or Violation. Subject to obtaining the Tempo
----------------------
Required Consents, including those listed on SCHEDULE 2, the execution, delivery
and performance of this Agreement by Tempo will not: (a) violate any provision
of the charter or bylaws of Tempo; (b) violate any Legal Requirement; (c)
subject to the obligations of Tele-Communications, Inc. under the agreement
described on SCHEDULE 5, require any consent, approval or authorization of,
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or any filing with or notice to, any Person; or (d) (i) violate, conflict with
or constitute a breach of or default under (without regard to requirements of
notice, passage of time or elections of any Person), (ii) permit or result in
the termination, suspension or modification of, (iii) result in the acceleration
of (or give any Person the right to accelerate) the performance of Tempo under,
or (iv) result in the creation or imposition of any Encumbrance under, any
instrument or other agreement to which Tempo is a party or by which Tempo or any
of its assets is bound or affected, except for purposes of clauses (b) or (d)
such violations, conflicts, breaches, defaults, terminations, suspensions,
modifications and accelerations as would not, individually or in the aggregate,
have a material adverse effect on Tempo, or on the ability of Tempo to perform
its obligations under this Agreement. SCHEDULE 2 lists all Tempo Required
Consents of which Tempo is aware as of the date of this Agreement.
6.4 Ownership of Satellites. On each Closing Date, Tempo will be
-----------------------
the legal and beneficial owner of the Satellite(s) which are being sold to
Telesat on such Closing Date, free and clear of all Encumbrances of any kind or
nature, except Permitted Encumbrances.
6.5 Finders and Brokers. Neither Tempo nor any of its Affiliates
-------------------
has employed any financial advisor, broker or finder or incurred any liability
for any financial advisory, brokerage, finder's or similar fee or commission in
connection with the transactions contemplated by this Agreement or the Operating
Services Agreement for which Telesat or any of its Affiliates could be liable.
6.6 Legal Proceedings. Except as set forth on SCHEDULE 4, except
-----------------
as may affect the DBS industry generally, and except with respect to any filings
made with the FCC opposing Tempo's or TCI's application for a license to uplink
to the Satellites, there is no judgment or order outstanding, or any action,
suit, complaint, proceeding or investigation by or before any Governmental
Authority or any arbitrator pending against Tempo or its assets, or to Tempo's
best knowledge, threatened against Tempo or its assets, which, if adversely
determined, would be reasonably expected to have a material adverse effect on
the ability of Tempo to consummate the transactions contemplated by this
Agreement or the Operating Services Agreement.
6.7 Construction Financing Agreement. All borrowings under the
--------------------------------
Construction Financing Agreements have been and will be used to finance or
refinance the payment of amounts or items included in the Satellite Purchase
Price.
6.8 BSS Construction Agreement. Tempo is not in breach or default
--------------------------
of any of its obligations under the BSS Construction Agreement where such breach
or default would have a material adverse effect on the ability of Tempo to
perform its obligations under this Agreement or on the ability of TCI to perform
the Operating Services Agreement.
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<PAGE>
SECTION 7. WARRANTIES AND LIMITATION OF LIABILITY.
7.1 Disclaimer of Warranties. ANY AND ALL EXPRESS AND IMPLIED
------------------------
WARRANTIES WITH RESPECT TO THE SATELLITES, THE TRANSPONDERS THEREON, AND THE
DELIVERABLE ITEMS, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR ANY PURPOSE OR USE, ARE EXPRESSLY EXCLUDED AND DISCLAIMED. IT
EXPRESSLY IS AGREED THAT TEMPO HAS NO OBLIGATIONS OR LIABILITIES FOR ANY FAILURE
OF A SATELLITE OR ANY TRANSPONDER THEREON TO PERFORM IN ACCORDANCE WITH THE
PERFORMANCE SPECIFICATIONS OR FOR ANY FAILURE OF A DELIVERABLE ITEM TO PERFORM
(INCLUDING, WITHOUT LIMITATION, LIABILITY ARISING FROM NEGLIGENCE). IT
EXPRESSLY IS AGREED THAT TELESAT'S EXCLUSIVE REMEDIES FOR ANY FAILURE OF A
SATELLITE OR ANY TRANSPONDER THEREON ARE LIMITED TO REMEDIES AGAINST LORAL AS
SET FORTH IN THE LORAL SIDE AGREEMENT AND ALL OTHER REMEDIES OF ANY KIND ARE
EXPRESSLY EXCLUDED.
7.2 Limitation of Liability. NEITHER PARTY SHALL BE LIABLE
-----------------------
DIRECTLY OR INDIRECTLY TO THE OTHER OR TO ANY PERMITTED ASSIGNEES OR SUCCESSOR
OWNERS OF THE SATELLITE(S) OR ANY TRANSPONDERS ON THE SATELLITES OR ANY
DELIVERABLE ITEMS FOR ANY AMOUNTS (INCLUDING ANY SUCH AMOUNTS CLAIMED BY THIRD
PARTIES) REPRESENTING LOSS OF PROFITS, LOSS OF BUSINESS, OR INDIRECT, SPECIAL,
EXEMPLARY, CONSEQUENTIAL OR PUNITIVE DAMAGES ARISING FROM THE PERFORMANCE OR
NONPERFORMANCE OF THIS CONTRACT OR ANY ACTS OR OMISSIONS ASSOCIATED THEREWITH OR
RELATED TO THE USE OF ANY ITEMS OR SERVICES FURNISHED HEREUNDER, WHETHER THE
BASIS OF THE LIABILITY IS BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE AND
STRICT LIABILITY), STATUTES OR ANY OTHER LEGAL THEORY, UNLESS SUCH ACT OR
OMISSION ARISES FROM THE NON-CLAIMING PARTY'S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT. TELESAT AGREES TO AN EQUIVALENT LIMITATION OF LIABILITY WITH RESPECT
TO LORAL. EACH PARTY SHALL USE ITS BEST EFFORTS, WHEN NEGOTIATING AGREEMENTS
WITH SATELLITE OR TRANSPONDER USERS AND OTHER PARTIES HAVING A FINANCIAL
INTEREST IN THE OPERATION AND USE OF THE SATELLITES OR THE TRANSPONDERS ON THE
SATELLITES, TO OBTAIN SUCH PARTY'S AGREEMENT TO AN EQUIVALENT LIMITATION OF
LIABILITY WITH RESPECT TO LORAL AND THE OTHER PARTY HERETO AND THEIR
SUBCONTRACTORS AND SUPPLIERS AT ANY TIER; PROVIDED, HOWEVER, THAT NEITHER PARTY
SHALL HAVE ANY LIABILITY TO THE OTHER PARTY FOR ITS FAILURE TO OBTAIN SUCH
LIMITATIONS OF LIABILITY.
WITHOUT LIMITING THE FOREGOING, IN NO EVENT SHALL TEMPO BE LIABLE FOR ANY
INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER FORESEEABLE
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OR NOT, OCCASIONED BY ANY DEFECT IN THE SATELLITES, THE TRANSPONDERS ON THE
SATELLITES, THE DELIVERABLE ITEMS, DELAY IN DELIVERY OF THE SATELLITES, FAILURE
OF THE SATELLITES, THE TRANSPONDERS ON THE SATELLITES OR THE DELIVERABLE ITEMS
TO PERFORM OR ANY OTHER CAUSE WHATSOEVER. TEMPO MAKES NO WARRANTY, EXPRESS OR
IMPLIED, TO ANY OTHER PERSON OR ENTITY CONCERNING THE SATELLITES, THE
TRANSPONDERS ON THE SATELLITES OR THE DELIVERABLE ITEMS.
SECTION 8. ADDITIONAL COVENANTS.
8.1 Required Consents; Industry Canada License Fees. Telesat will
-----------------------------------------------
diligently pursue and negotiate in good faith with the CRTC to obtain the
consent of the CRTC on or before May 31, 1996 on terms reasonably satisfactory
to Telesat and Tempo and will diligently attempt to satisfy the conditions of
Industry Canada set forth in its letter dated February 27, 1996 to the extent
capable of or appropriate for satisfaction on or before May 31, 1996. Tempo
will diligently pursue and negotiate in good faith with the FCC to obtain a
license to uplink to the Satellites on or before May 31, 1996. Telesat will
provide to TCI on or before May 31, 1996 its proposed form of the Telesat
Authorization Certificate. Telesat will use its best efforts to reach
agreement with Industry Canada as to the actual Industry Canada License Fee by
May 31, 1996.
8.2 Maintenance of Required Consents. Each Party will take all
--------------------------------
steps necessary or proper to preserve, renew and maintain in full force and
effect its Required Consents once they are obtained and to comply with the same,
including the defense of any action brought by a Governmental Authority with
respect to its Required Consents. After each applicable Closing Date, each Party
will apply for any additional authorizations, permits, licenses or consents
necessary to carry out its obligations hereunder, including, in the case of
Telesat, modifications and additions to the Telesat Required Consents from
Canadian Governmental Authorities or Persons as may be necessary to enable Tempo
to use the Tempo Transponders to transmit television programming and other
services into the United States and will comply with all applicable Legal
Requirements necessary to perform its obligations hereunder. Each Party will
give prompt written notice to the other Party of (a) the issuance of any
citation or order relating to its Required Consents that would have a material
adverse effect on its ability to perform its obligations under this Agreement,
(b) any lapse, suspension, revocation, rescission or other termination of its
Required Consents, (c) any notice to such Party of an alleged breach or
violation by such Party or any other Person of its Required Consents, (d) any
proceedings related to such Party's Required Consents if the outcome of such
proceedings could have a material adverse effect on such Party's ability to
perform its obligations hereunder or (e) any refusal of any Person to grant,
renew or extend such Party's Required Consents. Each Party will provide copies
to the other party of any and all applications, filings, requests for
modifications or other documents to be submitted to any Governmental Authority
in connection with the Required Consents and will give the other Party an
opportunity to comment on any aspects of the same that affect such Party
reasonably prior to their submission, and simultaneously with submission
thereof, will provide a copy thereof to such Party.
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<PAGE>
8.3 HSR Notification. As soon as practicable after the execution
----------------
of this Agreement, but in any event no later than 30 days after such execution
(or, if later, 15 days after the date on which such filing requirements become
applicable), the ultimate parent entity of each of Tempo and Telesat will
complete and file, or cause to be completed and filed, any notification and
report required to be filed in connection with the transactions contemplated
under this Agreement and the Operating Services Agreement, under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). Each of
the Parties will take any additional action that may be necessary, proper or
advisable, will cooperate to prevent inconsistencies between their respective
filings and will furnish to each other such necessary information and reasonable
assistance as the other may reasonably request in connection with its
preparation of necessary filings or submissions under the HSR Act. The Parties
shall take all commercially reasonable actions to respond promptly to any
requests for additional information from any Governmental Authority in
connection with the HSR Act. Tempo and Telesat will each pay one-half of any
required filing fee under the HSR Act.
8.4 Notification of Certain Matters. Each of Tempo and Telesat
-------------------------------
will promptly notify the other from time to time up to Closing of any fact,
event, circumstance or action (a) which, if known on the date of this Agreement,
would have been required to be disclosed to the other pursuant to this Agreement
or (b) the existence or occurrence of which would cause any of Tempo's or
Telesat's, as the case may be, representations or warranties under this
Agreement not to be correct and complete in any material respect if they were
made as of such date.
8.5 Transfer Taxes. Telesat will be responsible for the payment
--------------
of any federal, provincial or local sales, use, transfer, excise, documentary or
license taxes or fees or any other charge (including filing fees) imposed by any
Canadian Governmental Authority with respect to the transfer of the Satellites
and the Deliverable Items pursuant to this Agreement; provided, that in no event
will Telesat be responsible for the payment of any income taxes to which Tempo
may be subject. Tempo will be responsible for the payment of any federal, state
or local sales, use, transfer, excise, documentary or license taxes or fees or
any other charge (including filing fees) imposed by any United States
Governmental Authority with respect to the transfer of the Satellites and the
Deliverable Items pursuant to this Agreement; provided, that in no event will
Tempo be responsible for the payment of any income taxes to which Telesat may be
subject.
8.6 Updated Schedules. Not less than 5 nor more than 10 Business
-----------------
Days prior to the Pre-Closing and each Closing, Telesat will deliver to Tempo
revised copies of SCHEDULES 1 AND 3 and Tempo will deliver to Telesat revised
copies of SCHEDULES 2, 4 AND 5 which shall have been updated to show any changes
occurring between the date of this Agreement and the date of delivery; provided,
however, that for purposes of the Parties' representations and warranties and
covenants in this Agreement, all references to the Schedules will mean the
version of the Schedules attached to this Agreement on the date of signing.
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<PAGE>
8.7 Satisfaction of Conditions. Each Party will assist the other
--------------------------
Party in satisfying the conditions to the obligations of the other Party to
consummate the transactions contemplated by this Agreement, as set forth in
Section 10, provided, that, in the case of the Required Consents, such Required
Consents are on terms and conditions reasonably satisfactory to each Party.
Without limiting the foregoing, each Party agrees to assist the other Party in
its efforts to obtain the Required Consents applicable to such Party.
8.8 Confidentiality Regarding Terms and Existence of Agreement.
----------------------------------------------------------
None of the Parties will issue any press release or make any other public
announcement regarding this Agreement or the transactions contemplated hereby
without the consent of the other Party, such consent not to be unreasonably
delayed or denied. Each Party will hold, and will cause its employees,
consultants, advisors and agents to hold, in confidence, the existence and terms
of this Agreement, except to the extent the existence or terms of this Agreement
are or become a matter of public record, and any non-public information
concerning any other Party obtained pursuant to this Agreement. Notwithstanding
the preceding, a Party may disclose such information to the extent required by
any Legal Requirement (including disclosure requirements under federal,
provincial and state securities laws) or as a condition of obtaining any
Required Consent, but the Party proposing to disclose such information will
first notify and consult with the other Parties concerning the proposed
disclosure, to the extent reasonably feasible. Each Party also may disclose such
information to employees, consultants, advisors, agents and actual or potential
lenders whose knowledge is necessary to facilitate the consummation of the
transactions contemplated by this Agreement; provided that such representatives
will be required to observe the terms of this Section 8.8. Each Party's
obligation to hold information in confidence will be satisfied if it exercises
the same care with respect to such information as it would exercise to preserve
the confidentiality of its own similar information.
8.9 91 degrees Orbital Location. Tempo and TCI have submitted a
---------------------------
term sheet Telesat which outlines the financial terms on which TCI would be
willing to permit the Second Successfully Delivered Satellite to be launched
into the 91degrees West orbital location for a period ending no later than July
1, 1999 (the "Term Sheet"). The Term Sheet is attached to this Agreement as
EXHIBIT C. If Telesat notifies Tempo by May 15, 1996 that it wishes to proceed
with the deal outlined in the Term Sheet, Tempo agrees to negotiate in good
faith, and to cause TCI to negotiate in good faith, with Telesat to reach a
written agreement with Telesat by May 31, 1996 that contains (i) substantially
the terms set forth in the Term Sheet and such other terms and conditions as are
customary in transactions of the type contemplated by the Term Sheet and are
consistent with the relevant terms and conditions in the Operating Services
Agreement and (ii) such modifications to this Agreement and the Operating
Services Agreement as may be required to effect the result that the obligations
of the parties to such agreements with respect to the Satellite being launched
into the 91 degrees West orbital slot will, except with respect to financial
terms, mirror the obligations the Party has under this Agreement and the
Operating Services Agreement with respect to the Satellite being launched into
the 82 degrees West orbital slot. The intention of Telesat, TCI and Tempo is
that TCI's obligations under the Operating Services Agreement will not increase
as a result of the transaction between TCI and Telesat described in the Term
Sheet.
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<PAGE>
SECTION 9. CLOSING.
9.1 Pre-Closing. At least five days prior to the Shipment Date
-----------
for each Satellite, the Parties will conduct a pre-closing ("Pre-Closing") in
for accordance with the provisions of this Section 9.1. If all conditions
specified in Section 10 to the obligations of the Parties to consummate the
transactions contemplated by this Agreement have not been satisfied as of the
Pre-Closing Date and could not be satisfied if Closing were to occur on the date
of such Pre-Closing (assuming that Successfully Delivery of the Satellite with
respect to which such Pre-Closing is being held had occurred), Tempo will have
no obligation to instruct Loral to ship such Satellite to its Launch Site or to
launch such Satellite into the 82degrees West orbital location unless the Party
or Parties entitled to waive any unsatisfied conditions have waived such
conditions in writing. Unless the Parties otherwise agree, and notwithstanding
any provision to the contrary in this Agreement, any condition to a Party's
obligations under this Agreement or the Operating Services Agreement or to TCI's
obligations under the Operating Services Agreement that such Party or TCI waives
in writing as of the Pre-Closing Date will, to the extent so waived, no longer
be a condition to such Party's or TCI's obligation to close the transactions
contemplated by this Agreement or the Operating Services Agreement. If a Party
is aware as of a Pre-Closing Date of an unsatisfied condition to its obligations
under this Agreement or the Operating Services Agreement and does not then
notify the other Party of the existence of such unsatisfied condition, the non-
notifying Party shall be deemed to have waived such condition as of the Pre-
Closing Date, with the same effect specified in the preceding sentence for
written waivers.
9.1.1 The conditions to Telesat's obligations set forth in
Section 10.2 will be deemed to be capable of being satisfied as of a Pre-Closing
Date if on such Pre-Closing Date: (a) Tempo in all material respects has
performed and complied with, or could if Closing were then to occur perform and
comply with, each obligation, agreement, covenant and condition required by this
Agreement to be performed or complied with by Tempo prior to or at the Closing,
(b) all representations and warranties of Tempo contained in this Agreement are,
if specifically qualified by materiality, true in all respects and, if not so
qualified, true in all material respects, in each case on and as of the Pre-
Closing Date with the same effect as if made on and as of the Pre-Closing Date,
except for changes permitted or contemplated by this Agreement or the Operating
Services Agreement and except with respect to representations and warranties
made as of a specific date; (c) the BSS Construction Agreement is in full force
and effect and no waivers under or amendments to the BSS Construction Agreement
for which the consent of Telesat is required under Section 4 of this Agreement
have been made or entered into without the consent of Telesat; (d) Tempo
delivers to Telesat on such Pre-Closing Date a certificate of the President or
Vice President of Tempo certifying as to the matters in (a), (b) and (c); (e)
TCI in all material respects has performed and complied with, or could if
Closing were then to occur perform and comply with, each obligation, agreement,
covenant and condition required by the Operating Services Agreement to be
performed or complied with by TCI prior to or at the Closing; (f) all
representations and warranties of TCI contained in the Operating Services
Agreement are, if specifically qualified by materiality, true in all respects
and, if not so qualified, true in all material respects, in each case on and as
of the Pre-Closing Date with the
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<PAGE>
same effect as if made on and as of the Pre-Closing Date, except for changes
permitted or contemplated by this Agreement or the Operating Services Agreement
and except with respect to representations and warranties made as of a specific
date; (g) TCI delivers to Telesat on such Pre-Closing Date a certificate of the
President or Vice President of TCI certifying as to the matters in (e) and (f);
(h) Tempo delivers to Telesat (i) complete and correct copies of all Tempo
Required Consents; (ii) the opinions required under Section 10.2.5, dated as of
the Pre-Closing Date; and (iii) its written agreement to deliver to Telesat on
the Closing Date such documents as Telesat has requested in writing be delivered
pursuant to Section 10.2.8.
9.1.2 The conditions to Tempo's obligations set forth in
Section 10.3 will be deemed to be capable of being satisfied as of a Pre-Closing
Date if on such Pre-Closing Date: (a) Telesat delivers evidence satisfactory to
Tempo acting reasonably that Telesat will have funds on the Closing Date that
are in an amount equal to the Purchase Price of First Successfully Delivered
Satellite minus the Transponder Purchase Price payable by TCI for the
transponders to be acquired by it on the First Successfully Delivered Satellite
or, if such Pre-Closing Date is for the Second Closing, the Purchase Price of
Second Successfully Delivered Satellite minus the Transponder Purchase Price
payable by TCI on the Second Closing Date; (b) Telesat in all material respects
has performed and complied with, or could if Closing were then to occur perform
and comply with, each obligation, agreement, covenant and condition required by
this Agreement or the Operating Services Agreement to be performed or complied
with by Telesat prior to the Closing; (c) all representations and warranties of
Telesat contained in this Agreement and the Operating Services Agreement are, if
specifically qualified by materiality, true in all respects and, if not so
qualified, true in all material respects, in each case on and as of the Pre-
Closing Date with the same effect as if made on and as of the Pre-Closing Date,
except for changes permitted or contemplated by this Agreement or the Operating
Services Agreement and except with respect to representations and warranties
made as of a specific date; (d) Telesat delivers to Tempo a certificate of the
President or Vice President of Telesat certifying as to the matters in (a), (b)
and (c); and (e) Telesat delivers to Tempo complete and correct copies of (i)
all Telesat Required Consents and the Telesat Authorization Certificate
certifying that the matters covered by such certificate are true as of the Pre-
Closing Date; (ii) the opinions required under Section 10.3.5, dated as of the
Pre-Closing Date; and (iii) its written agreement to deliver to Tempo on the
Closing Date such documents as Tempo has requested in writing be delivered
pursuant to Section 10.3.7.
9.2 Closing as to First Successfully Delivered Satellite. The
----------------------------------------------------
First Closing shall occur for the First Successfully Delivered Satellite and the
related Deliverable Items on the 180th day after the launch of such Satellite if
(i) such Satellite has then been Successfully Delivered; (ii) title to such
Satellite has transferred from Loral to Tempo on or before such date; and (iii)
all other conditions to the First Closing contained in this Agreement (other
than those based on acts to be performed at the First Closing), including the
obtaining of the Required Consents, have been satisfied or waived.
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9.3 Closing as to Second Successfully Delivered Satellite. The
-----------------------------------------------------
Second Closing shall occur for the Second Successfully Delivered Satellite and
the related Deliverable Items on the 180th day after the launch of such
Satellite if (i) such Satellite has then been Successfully Delivered; (ii) title
to such Satellite has transferred from Loral to Tempo on or before such date;
and (iii) all other conditions to the Second Closing contained in this Agreement
(other than those based on acts to be performed at the Second Closing),
including the obtaining of the Required Consents, have been satisfied or waived.
9.4 Location of Closing. All Pre-Closings, the First Closing and,
-------------------
if applicable, the Second Closing, will be held at 10:00 a.m. local time at the
offices of Stikeman, Elliott in Toronto, or will be conducted by mail or at such
place and time as Tempo and Telesat may agree.
SECTION 10. CONDITIONS TO CLOSING.
10.1 Conditions to the Obligations of the Parties. The obligations
--------------------------------------------
of each Party to consummate the transactions contemplated by this Agreement to
take place at each Closing are subject to the satisfaction at or prior to each
Closing Date of each of the following conditions or the waiver in writing by
both Parties of such conditions:
10.1.1 All filings required under the HSR Act shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction, which has
not been previously resolved, to restrain the consummation of the transactions
contemplated by this Agreement or the Operating Services Agreement.
10.1.2 All Required Consents shall have been obtained on
terms and conditions reasonably satisfactory to both Telesat and Tempo and shall
remain in full force and effect on the applicable Closing Date and no facts or
conditions shall exist which would constitute grounds for any Governmental
Authority to suspend, revoke or annul any Required Consent.
10.1.3 No action, suit or proceeding is pending or
threatened by or before any Governmental Authority and no Legal Requirement or
interpretation thereof shall have been enacted, promulgated or deemed applicable
after the date hereof and no order, decree, writ or injunction shall have been
issued after the date hereof and remain in effect on the applicable Closing Date
by any Governmental Authority which would or does restrain, enjoin, prohibit or
otherwise make illegal (a) the consummation of the transactions contemplated by
this Agreement or the Operating Services Agreement or (b) the intended use by
TCI of the transponders to be purchased by it to transmit television programming
and other services into the United States or (c) the use by any Canadian DBS
Provider of the Telesat Transponders (as defined in the Operating Services
Agreement) to transmit television programming and other services into
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<PAGE>
Canada, in each case other than any arrangement to which any Party or an
Affiliate of any Party has entered into voluntarily.
10.2 Conditions to the Obligations of Telesat. The obligations of
----------------------------------------
Telesat to consummate the transactions contemplated by this Agreement to take
place at each Closing are subject to the satisfaction at or prior to each
Closing Date of each of the following conditions or the waiver in writing by
Telesat of such conditions:
10.2.1 All of the conditions to the obligations of Telesat to
consummate the transactions contemplated by the Operating Services Agreement
shall have been satisfied or be capable of being satisfied if closing thereunder
were to then occur.
10.2.2 All representations and warranties of Tempo contained
in this Agreement and of TCI contained in the Operating Services Agreement shall
be, if specifically qualified by materiality, true in all respects and, if not
so qualified, shall be true in all material respects, in each case on and as of
the Closing Date with the same effect as if made on and as of the Closing Date,
except for changes permitted or contemplated by this Agreement or the Operating
Services Agreement and except with respect to representations and warranties
made as of a specific date.
10.2.3 Tempo in all material respects shall have performed
and complied with each obligation, agreement, covenant and condition required by
this Agreement to be performed or complied with by Tempo at or prior to the
Closing and TCI in all material respects shall have performed and complied with
each obligation, agreement, covenant and condition required by the Operating
Services Agreement to be performed or complied with by TCI at or prior to the
Closing.
10.2.4 TCI shall have executed and delivered to Telesat the
Assignment Agreement and the Security Agreement.
10.2.5 Telesat shall have received the opinions of corporate
counsel and communications counsel for Tempo and TCI with respect to matters
customarily covered in opinions given with respect to transactions of the type
contemplated by this Agreement, dated the Closing Date, in form and substance
reasonably satisfactory to Telesat, it being agreed that the forms of opinion
accepted by Telesat at Pre-Closing will be deemed to be acceptable for Closing
purposes as well.
10.2.6 Tempo shall have delivered to Telesat complete and
correct copies of the Tempo Required Consents.
10.2.7 The BSS Construction Agreement shall be in full force
and effect and no waivers under or amendments to the BSS Construction Agreement
for which the consent
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<PAGE>
of Telesat is required under Section 4 of this Agreement shall have been made or
entered into without the consent of Telesat.
10.2.8 Tempo shall have delivered to Telesat such other
documents as Telesat may reasonably and customarily have requested in writing
prior to the Pre-Closing Date for such Closing in connection with the
transactions contemplated by this Agreement and the Operating Services
Agreement.
10.3 Conditions to Obligations of Tempo. The obligation of Tempo
----------------------------------
to consummate the transactions contemplated by this Agreement to take place at
each Closing are subject to the satisfaction at or prior to each Closing Date of
each of the following conditions or the waiver by Tempo in writing of such
conditions:
10.3.1 All of the conditions to the obligations of TCI to
consummate the transactions contemplated by the Operating Services Agreement
shall have been satisfied or be capable of being satisfied if closing thereunder
were to then occur.
10.3.2 Tempo shall have received the Satellite Purchase Price
in accordance with the provisions of Section 3 of this Agreement.
10.3.3 All representations and warranties of Telesat
contained in this Agreement and the Operating Services Agreement shall be, if
specifically qualified by materiality, true and correct in all respects and, if
not so qualified, shall be true and correct in all material respects, in each
case on and as of the Closing Date with the same effect as if made on and as of
the Closing Date, except for changes permitted or contemplated by this Agreement
or the Operating Services Agreement and except with respect to representations
and warranties made as of a specific date.
10.3.4 Telesat in all material respects shall have performed
and complied with each obligation, agreement, covenant and condition required by
this Agreement or the Operating Services Agreement to be performed or complied
with by Telesat at or prior to the Closing.
10.3.5 Tempo shall have received the opinions of corporate
counsel and communications counsel for Telesat with respect to matters
customarily covered in opinions given with respect to transactions of the type
contemplated by this Agreement, dated the Closing Date, in form and substance
reasonably satisfactory to Tempo, it being agreed that the form of opinion
accepted by Tempo at Pre-Closing will be deemed to be acceptable for Closing
purposes as well.
10.3.6 Telesat shall have delivered to Tempo complete and
correct copies of the Telesat Required Consents, and the Telesat Authorization
Certificate signed by the President of Telesat and dated the Closing Date.
-25-
<PAGE>
10.3.7 Telesat shall have delivered to Tempo such other
documents as Tempo may reasonably and customarily have requested in writing
prior to the Pre-Closing Date for such Closing in connection with the
transactions contemplated by this Agreement and the Operating Services
Agreement.
SECTION 11. TERMINATION.
11.1 Termination Prior to First Closing. This Agreement may be
----------------------------------
terminated and the transactions contemplated by this Agreement may be abandoned
at any time prior to the First Closing:
(a) by the mutual written consent of Tempo and Telesat; or
(b) (i) by either Party if Exhibit F to the Operating
Services Agreement is not agreed to by both Parties by May 31, 1996, it being
agreed that if Exhibit F is not agreed to by May 31, 1996 but neither Party
terminates this Agreement on such date, the right of termination set forth in
this Section 11.1(b)(i) will continue unless and until the Parties agree to
Exhibit F; (ii) by either Party if the amount of the final Industry Canada
License Fee is not determined by May 31, 1996 and the Parties have not by then
agreed on an amendment to this Agreement regarding the allocation of that
portion of the Industry Canada License Fee [*****], it being agreed that if this
Agreement is terminable pursuant to this Section 11.1(b)(ii) on May 31, 1996 but
neither Party terminates this Agreement on such date, the right of termination
set forth in this Section 11.1(b)(ii) will continue unless and until the final
Industry Canada License Fee [*****] or the parties agree to an amendment to this
Agreement regarding the allocation of that portion of the Industry Canada
License Fee [*****] ; (iii) by either Party if the final Industry Canada License
Fee is determined by May 31, 1996 [*****] unless the Parties have agreed to an
amendment to this Agreement by May 31, 1996 with respect to the allocation
between the Parties of that portion of the Industry Canada License Fee [*****]
it being agreed that if this Agreement is terminable pursuant to this Section
11.1(b)(iii) on May 31, 1996 but neither Party terminates this Agreement on such
date, the right of termination set forth in this Section 11.1(b)(iii) will
continue unless and until the parties agree to an amendment to this Agreement
regarding the allocation of that portion, if any, of the Industry Canada License
Fee [*****] ; (iv) by either Party if Telesat has not delivered to Tempo by May
27, 1996, correct and complete copies of resolutions of the board of directors
of Telesat, certified by Telesat's secretary, authorizing the execution,
delivery and performance by Telesat of this Agreement, the Operating Services
Agreement, the Loral Side Agreement and all other documents, instruments and
agreements to be delivered by Telesat in connection with such agreements, it
being agreed that if such resolutions are not delivered to Tempo by May 27, 1996
but neither Party terminates this Agreement on such date, the right of
termination set forth in this Section 11.1(b)(iv) will continue unless and until
Telesat delivers such resolutions to Tempo; and (v) by Tempo if Telesat has not
delivered to it on or before May 31, 1996, the Telesat Authorization Certificate
signed by the President of Telesat, it being agreed
-26-
<PAGE>
that if the Telesat Authorization Certificate is not delivered to Tempo by May
31, 1996 but Tempo does not terminate this Agreement on such date, the right of
termination set forth in this Section 11.1(b)(v) will continue unless and until
Telesat delivers the Telesat Authorization Certificate to Tempo; or
(c) (i) by either Party if Tempo has not delivered to Telesat
by May 27, 1996, correct and complete copies of resolutions of the board of
directors of Tempo, certified by Tempo's secretary, authorizing the execution,
delivery and performance by Tempo of this Agreement, the Loral Side Agreement
and all other documents, instruments and agreements to be delivered by Tempo in
connection with such agreements and correct and complete copies of resolutions
of the board of directors of TCI, certified by TCI's secretary, authorizing the
execution, delivery and performance by TCI of the Operating Services Agreement
and all other documents, instruments and agreements to be delivered by TCI in
connection therewith, it being agreed that if such resolutions are not delivered
to Telesat by May 27, 1996 but neither Party terminates this Agreement on such
date, the right of termination set forth in this Section 11.1(c)(i) will
continue unless and until Tempo delivers such resolutions to Telesat; (ii) by
Telesat, if Tempo has not delivered to Telesat by May 31, 1996, evidence that
Tempo or TCI has obtained a license from the FCC to uplink to the Satellites
upon launch, it being agreed that if such evidence is not delivered to Telesat
by May 31, 1996 but Telesat does not terminate this Agreement on such date, the
right of termination set forth in this Section 11.1(c)(ii) will continue unless
and until Tempo delivers such evidence to Telesat and (iii) by Telesat if the
Loral Side Agreement substantially in the form attached hereto as EXHIBIT D is
not signed by Loral on or before May 10, 1996, it being agreed that if the Loral
Side Agreement is not signed by Loral by May 10, 1996 but Telesat does not
terminate this Agreement on such date, the right of termination set forth in
this Section 11.1(c)(iii) will continue unless and until the Loral Side
Agreement is signed by Loral (either in the form of EXHIBIT D or as modified
with the consent of Telesat, not to be unreasonably withheld); or
(d) by either Tempo or Telesat if the transactions
contemplated by this Agreement to take place at the First Closing have not been
consummated on or before the date which is eighteen months from the date of this
Agreement (the "Anniversary Date") for any reason other than (i) a material
breach or default by such Party in the performance of any of its obligations
under this Agreement or the Operating Services Agreement or by TCI in the
performance of any of its obligations under the Operating Services Agreement;
(ii) the failure of any representation or warranty of such Party in this
Agreement or the Operating Services Agreement (or of TCI in the Operating
Services Agreement) that is specifically qualified by materiality to be true in
all respects or the failure of any such representation and warranty that is not
so qualified to be true in all material respects, (iii) the failure of Loral to
Successfully Deliver at least one Satellite by the Anniversary Date if Tempo has
not terminated the BSS Construction Agreement as of such date and is pursuing
its rights thereunder to have Loral construct replacement Satellites thereunder,
or (iv) the occurrence of an event of Force Majeure; provided, that if the First
Closing has not occurred by the Anniversary Date because of an event of Force
Majeure, the Parties shall negotiate in good faith for a period of six months
following the
-27-
<PAGE>
Anniversary Date to modify the terms of this Agreement to overcome such event of
Force Majeure while preserving each Party's economic interest; or
(e) automatically, if the BSS Construction Agreement is
terminated prior to the First Closing.
11.2 Termination Following First Closing. This Agreement may be
-----------------------------------
terminated as to the Second Closing and the transactions contemplated by Section
3.2 may be abandoned at any time after the First Closing but prior to the Second
Closing:
(a) by the mutual written consent of Tempo and Telesat; or
(b) by Tempo if at any time after the First Closing the BSS
Construction Agreement is terminated other than as a result of a material breach
or default by Tempo under such agreement or Tempo elects in accordance with its
rights under the BSS Construction Agreement to discontinue pursuing its rights
to have Loral construct replacement Satellites thereunder; or
(c) by either Tempo or Telesat if the transactions
contemplated by this Agreement to take place at the Second Closing have not been
consummated on or before the date which is one year from the date of the First
Closing (the "Second Anniversary Date") for any reason other than (i) a material
breach or default by such Party in the performance of any of its obligations
under this Agreement or the Operating Services Agreement or by TCI in the
performance of any of its obligations under the Operating Services Agreement,
(ii) the failure of any representation or warranty of such Party in this
Agreement or the Operating Services Agreement (or of TCI in the Operating
Services Agreement) that is specifically qualified by materiality to be true in
all respects or the failure of any such representation and warranty that is not
so qualified to be true in all material respects; (iii) the failure of Loral to
Successfully Deliver a second Satellite by the Second Anniversary Date if Tempo
has not terminated the BSS Construction Agreement as of such date and is
pursuing its rights thereunder to have Loral construct replacement Satellites,
or (iv) the occurrence of an event of Force Majeure; provided, that if the
Second Closing has not occurred by the Second Anniversary Date because of an
event of Force Majeure, the Parties shall negotiate in good faith for a period
of six months following the Second Anniversary Date to modify the terms of this
Agreement to overcome such event of Force Majeure while preserving each Party's
economic interest.
11.3 Liabilities in Event of Termination. Upon any termination of
-----------------------------------
this agreement pursuant to Section 11.1(a), (b) or (c) the Parties shall have no
further obligations or liabilities to each other hereunder except pursuant to
Section 8.8. The termination or expiration of this Agreement for any other
reason will in no way limit any obligation or liability of either Party based on
or arising from a breach or default by such Party with respect to any of its
representations, warranties, or any of its covenants or agreements contained in
this Agreement which by their terms were to be performed prior to the date of
termination or expiration, nor shall
-28-
<PAGE>
any such termination or expiration release either Party from its liabilities or
obligations under Section 8.8 or Section.12.2, 12.3 or 12.4 of this Agreement to
the extent applicable to obligations arising prior to termination.
11.4 Procedure Upon Termination. In the event of the termination
--------------------------
of this Agreement by Tempo or Telesat pursuant to this Section, notice of such
termination will promptly be given by the terminating Party to the other
Parties.
SECTION 12. SURVIVAL OF COVENANTS, REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION.
12.1 Survival of Covenants, Representations and Warranties After
-----------------------------------------------------------
Closing. The representations, warranties and covenants of the Parties contained
- -------
in this Agreement and in the documents and instruments to be delivered by the
Parties pursuant to this Agreement will survive the First Closing and the Second
Closing and will continue in full force and effect without limitation.
12.2 Indemnification by Telesat. Subject to the limitations on
--------------------------
liability set forth in Section 7 of this Agreement, Telesat will indemnify,
defend and hold harmless Tempo and its shareholders and their respective
Affiliates, and the shareholders, directors, officers, employees, agents,
successors and assigns of any of such Persons (the "Tempo Indemnitees"), from
and against:
(a) all losses, damages, liabilities, deficiencies or
obligations of or to any of the Tempo Indemnitees resulting from or arising out
of (i) any representation or warranty made by Telesat in this Agreement not
being true and accurate in all material respects when made or, in the case of
any representation or warranty which is qualified by its terms by a materiality
requirement, not being true and accurate when made, (ii) any material breach of
any covenant, agreement or obligation of Telesat contained in this Agreement or
the Loral Side Agreement, or, in the case of any agreement, covenant or
obligation contained in this Agreement or the Loral Side Agreement which is
qualified by a limitation that performance need only be material, any breach of
such agreement, covenant or obligation, including any claim by Loral against
Tempo which arises out of the same, (iii) any matter described on SCHEDULE 3;
and
(b) all claims, actions, suits, proceedings, demands,
judgments, assessments, fines, interest, penalties, costs and expenses
(including settlement costs and reasonable legal, accounting, experts' and other
fees, costs and expenses) incident or relating to or resulting from any of the
foregoing.
12.3 Indemnification by Tempo . Subject to the limitations on
-------------------------
liability set forth in Section 7 of this Agreement, Tempo will indemnify, defend
and hold harmless Telesat and its shareholders and their respective Affiliates,
and the shareholders, directors, officers, employees, agents, successors and
assigns of any of such Persons (the "Telesat Indemnitees"), from and against:
-29-
<PAGE>
(a) all losses, damages, liabilities, deficiencies or
obligations of or to any of the Telesat Indemnitees resulting from or arising
out of (i) any representation or warranty made Tempo in this Agreement not being
true and accurate in all material respects when made or, in the case of any
representation or warranty which is qualified by its terms by a materiality
requirement, not being true and accurate when made, (ii) any material breach of
any covenant, agreement or obligation of Tempo contained in this Agreement or
the Loral Side Agreement, or, in the case of any agreement, covenant or
obligation contained in this Agreement or the Loral Side Agreement which is
qualified by a limitation that performance need only be material, any breach of
such agreement, covenant or obligation, including any claim by Loral against
Telesat which arises out of the same, (iii) any matter described on SCHEDULE 4;
and
(b) all claims, actions, suits, proceedings, demands,
judgments, assessments, fines, interest, penalties, costs and expenses
(including settlement costs and reasonable legal, accounting, experts' and other
fees, costs and expenses) incident or relating to or resulting from any of the
foregoing.
12.4 Third Party Claims. Promptly after the receipt by any Person
------------------
entitled to indemnification hereunder of notice of any claim, action, suit or
proceeding by any Person who is not a Party to this Agreement (collectively, an
"Action"), which Action is subject to indemnification under this Agreement, such
Person (the "Indemnified Party") will give reasonable written notice to the
Party from whom indemnification is claimed (the "Indemnifying Party"). The
Indemnified Party will be entitled, at the sole expense and liability of the
Indemnifying Party, to exercise full control of the defense, compromise or
settlement of any such Action unless the Indemnifying Party, within a reasonable
time after the giving of such notice by the Indemnified Party, (a) notifies the
Indemnified Party in writing of the Indemnifying Party's intention to assume
such defense, (b) provides evidence reasonably satisfactory to the Indemnified
Party of the Indemnifying Party's ability to pay the amount, if any, for which
the Indemnified Party may be liable as a result of such Action and (c) retains
legal counsel reasonably satisfactory to the Indemnified Party to conduct the
defense of such Action. The other Party will cooperate with the Party assuming
the defense, compromise or settlement of any such Action in accordance with this
Agreement in any manner that such Party reasonably may request. If the
Indemnifying Party so assumes the defense of any such Action, the Indemnified
Party will have the right to employ separate counsel and to participate in (but
not control) the defense, compromise or settlement of the Action, but the fees
and expenses of such counsel will be at the expense of the Indemnified Party
unless (i) the Indemnifying Party has agreed to pay such fees and expenses, (ii)
any relief other than the payment of money damages is sought against the
Indemnified Party or (iii) the Indemnified Party will have been advised by its
counsel that there may be one or more defenses available to it which are
different from or additional to those available to the Indemnifying Party, and
in any such case that portion of the fees and expenses of such separate counsel
that are reasonably related to matters covered by the indemnity provided in this
Section will be paid by the Indemnifying Party. No Indemnified Party will
settle or compromise any such Action for which it is entitled to indemnification
under this Agreement without the prior written consent of the Indemnifying
Party, unless the Indemnifying Party has
-30-
<PAGE>
failed, after reasonable notice, to undertake control of such Action in the
manner provided in this Section. No Indemnifying Party will settle or
compromise any such Action (A) in which any relief other than the payment of
money damages is sought against any Indemnified Party or (B) in the case of any
Action relating to the Indemnified Party's liability for any tax, if the effect
of such settlement would be an increase in the liability of the Indemnified
Party for the payment of any tax for any period beginning after the applicable
Closing Date, unless the Indemnified Party consents in writing to such
compromise or settlement.
12.5 Limitations on Certain Indemnification Obligations - Telesat.
------------------------------------------------------------
Telesat will not be liable for indemnification arising under Section 12.2 for
(a) any losses, damages, liabilities, deficiencies or obligations of or to any
of the Tempo Indemnitees or (b) any claims, actions, suits, proceedings,
demands, judgments, assessments, fines, interest, penalties, costs and expenses
(including settlement costs and reasonable legal, accounting, experts' and other
fees, costs and expenses) incident or relating to or resulting from any of the
foregoing (the items described in clauses (a) and (b) collectively being
referred to for purposes of this Section as "Tempo Damages") unless the amount
of Tempo Damages for which Telesat would, but for the provisions of this
Section, be liable exceeds, on an aggregate basis, [*****], in which case
Telesat will be liable for all such Tempo Damages, up to a maximum aggregable
amount for all Tempo Damages of [*****], which will be due and payable within 15
days after Telesat's receipt of a statement therefor.
12.6 Limitations on Certain Indemnification Obligations - Tempo.
----------------------------------------------------------
Tempo will not be liable for indemnification arising under Section 12.3 for (a)
any losses, damages, liabilities, deficiencies or obligations of or to any of
the Telesat Indemnitees or (b) any claims, actions, suits, proceedings, demands,
judgments, assessments, fines, interest, penalties, costs and expenses
(including settlement costs and reasonable legal, accounting, experts' and other
fees, costs and expenses) incident or relating to or resulting from any of the
foregoing (the items described in clauses (a) and (b) collectively being
referred to for purposes of this Section as "Telesat Damages") unless the amount
of Telesat Damages for which Tempo would, but for the provisions of this
Section, be liable exceeds, on an aggregate basis, [*****] in which case Tempo
will be liable for all such Telesat Damages, up to a maximum aggregable amount
for all Telesat Damages of [*****], which will be due and payable within 15 days
after Tempo's receipt of a statement therefor.
SECTION 13. MISCELLANEOUS.
13.1 Parties Obligated and Benefited. Subject to the limitations
-------------------------------
set forth below, this Agreement will be binding upon the Parties and their
respective assigns and successors in interest and will inure solely to the
benefit of the Parties and their respective assigns and successors in interest,
and no other Person will be entitled to any of the benefits conferred by this
Agreement. Without the prior written consent of the other Parties, no Party will
assign any of its rights under this Agreement or delegate any of its duties
under this Agreement, provided that Tempo may, without the consent of any other
Party, assign or delegate all of its
-31-
<PAGE>
rights and obligations under this Agreement to Primestar or any Affiliate of
Tempo; provided that Tempo gives prior written notice to Telesat and delivers to
Telesat an assumption agreement of such assignee pursuant to which such assignee
assumes the obligations of Tempo under this Agreement and provided further that
in the event of such an assignment, Tempo will not be released from its
obligations under this Agreement. Without the prior written consent of Telesat,
Tempo agrees that it will not assign its rights under the BSS Construction
Agreement to acquire the Satellites; provided that Tempo may, without the
consent of Telesat, assign such rights to Primestar or any Affiliate of Tempo if
an assignment of this Agreement pursuant to the preceding sentence is also made
to such assignee.
13.2 Notices. Any notice, request, demand, waiver or other
-------
communication required or permitted to be given under this Agreement will be in
writing and will be deemed to have been duly given only if delivered in person
or by first class, prepaid, registered or certified mail, or sent by courier or
by overnight delivery service, or, if receipt is confirmed, by telecopier:
To Tempo at:
National Digital Television Center
4100 East Dry Creek Road
Littleton, CO 80122
Attention: David P. Beddow
Telephone: (303) 486-3815
Telecopy: (303) 486-3890
With copies to:
Tele-Communications, Inc.
5619 DTC Parkway
Englewood, CO 80111
Attention: Legal Department
Telephone: (303) 267-5500
Telecopy: (303) 488-3245
-32-
<PAGE>
To Telesat at:
1601 Telesat Court
Gloucester, Ontario
CANADA K1B 5P4
Attention: Secretary
Telephone: 613-748-0123
Telecopy: 613-748-8784
Any Party may change the address to which notices are required to be sent by
giving notice of such change in the manner provided in this Section. All
notices will be deemed to have been received on the date of delivery or on the
third Business Day after mailing in accordance with this Section, except that
any notice of a change of address will be effective only upon actual receipt.
13.3 Attorneys' Fees. In the event of any action or suit based
---------------
upon or arising out of any alleged breach by any Party of any representation,
warranty, covenant or agreement contained in this Agreement, the prevailing
Party will be entitled to recover reasonable attorneys' fees and other costs of
such action or suit from the other Parties.
13.4 Right to Specific Performance. The Parties acknowledge that
-----------------------------
the unique nature of the Satellites renders money damages an inadequate remedy
for the breach by Tempo of its obligations under this Agreement, and the Parties
agree that in the event of such breach, Telesat will, upon proper action
instituted by it, be entitled to a decree of specific performance of this
Agreement.
13.5 Waiver. This Agreement or any of its provisions may not be
------
waived except in writing. The failure of any Party to enforce any right arising
under this Agreement on one or more occasions will not operate as a waiver of
that or any other right on that or any other occasion.
13.6 Captions. The section captions contained in this Agreement
--------
are for convenience only and do not constitute a part of this Agreement.
13.7 CHOICE OF LAW. THIS AGREEMENT AND THE RIGHTS OF THE PARTIES
-------------
UNDER IT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICTS OF LAWS RULES OF THE STATE OF
NEW YORK; PROVIDED THAT ANY PROVISION OF THIS AGREEMENT WHICH IS IDENTICAL TO A
PROVISION ALSO SET FORTH IN THE OPERATING SERVICES AGREEMENT WILL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE PROVINCE OF ONTARIO AND THE
LAWS OF CANADA
-33-
<PAGE>
APPLICABLE THEREIN WITHOUT REGARD TO THE CONFLICTS OF LAWS RULES OF THE PROVINCE
OF ONTARIO.
13.8 Terms. Terms used with initial capital letters will have the
-----
meanings specified, applicable to both singular and plural forms, for all
purposes of this Agreement. The word "include" and derivatives of that word are
used in this Agreement in an illustrative sense rather than limiting sense and
the word "or" is not exclusive.
13.9 Rights Cumulative. Subject to the limitations on liability
-----------------
and remedies set forth in Section 7 of this Agreement, all rights and remedies
of each of the Parties under this Agreement will be cumulative, and the exercise
of one or more rights or remedies will not preclude the exercise of any other
right or remedy available under this Agreement or applicable law.
13.10 Further Actions. The Parties will execute and deliver to the
---------------
other, from time to time at or after the Closings, for no additional
consideration, such further assignments, certificates, instruments, records, or
other documents, assurances or things as may be reasonably necessary to give
full effect to this Agreement and to allow each Party fully to enjoy and
exercise the rights accorded and acquired by it under this Agreement, if such
requested further action will not impose any expense or material additional
obligations on the Party from whom such further action is requested.
13.11 Time. Time is of the essence under this Agreement. If the
----
last day permitted for the giving of any notice or the performance of any act
required or permitted under this Agreement falls on a day which is not a
Business Day, the time for the giving of such notice or the performance of such
act will be extended to the next succeeding Business Day.
13.12 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed an original.
13.13 Entire Agreement. References to this Agreement include the
----------------
Schedules, Exhibits and Attachment referred to in this Agreement, which are
incorporated in and constitute a part of this Agreement. This Agreement
supersedes all prior oral or written agreements and understandings between the
Parties with respect to the sale of the Satellites to Telesat. This Agreement
does not affect or supersede the Telesat Agreements or the Loral Side Agreement.
This Agreement may not be amended or modified except by a writing signed by the
Parties.
13.14 Severability. Any term or provision of this Agreement which
------------
is invalid or unenforceable will be ineffective to the extent of such invalidity
or unenforceability without rendering invalid or unenforceable the remaining
rights of the Person intended to be benefitted by such provision or any other
provisions of this Agreement.
-34-
<PAGE>
13.15 Construction. This Agreement has been negotiated by Tempo,
------------
Telesat and their respective legal counsel, and legal or equitable principles
that might require the construction of this Agreement or any provision of this
Agreement against the Party drafting this Agreement will not apply in any
construction or interpretation of this Agreement.
13.16 Expenses. Except as set forth in the second sentence of this
--------
Section 13.16 and as otherwise expressly provided in this Agreement, each Party
will pay all of its own expenses, including attorneys' and accountants' fees, in
connection with the negotiation of this Agreement, the performance of its
obligations and the consummation of the transactions contemplated by this
Agreement. Tempo will reimburse Telesat for its reasonable outside legal
expenses associated with this Agreement if Tempo unilaterally terminates this
Agreement after Telesat delivers to Tempo the executed Telesat Authorization
Certificate and while such certificate remains in full force and effect;
provided, that the foregoing shall not apply if Tempo terminates this Agreement
following a material breach by Telesat or if this Agreement is terminated
pursuant to Section 11.1(b), Section 11.1(d) or Section 11.2.
13.17 Waiver of Tax Warranties. No Party makes any representation
------------------------
or warranty, express or implied, with respect to the tax implications of any
aspect of the transactions contemplated under this Agreement on any other Party
to this Agreement and all Parties expressly disclaim any such representation or
warranty with respect to any tax consequences arising under this Agreement. Each
Party has relied solely on its own tax advisors with respect to the tax
implications of the transactions contemplated under this Agreement.
Notwithstanding the provisions of this Section 13.17, each Party may fully rely
on the representations, warranties and covenants expressly made in this
Agreement, which will not be deemed waived or affected by this Section 13.17.
13.18 Characterization of this Transaction. The Parties hereby
------------------------------------
agree that the transactions contemplated by this Agreement and the Operating
Services Agreement will be recorded and reported for all purposes, including
without limitation for tax purposes, as (i) the acquisition by Telesat of the
Satellites for an amount equal to the Satellite Purchase Price; (ii) the
disposition by Telesat, and the acquisition by TCI, of TCI Transponders (as
defined in the Operating Services Agreement) for an amount equal to the
Transponder Purchase Price; and (iii) the undertaking by TCI to subscribe for
and pay quarterly operating fees, for 48 consecutive quarters, in consideration
of the services provided by Telesat under the Operating Services Agreement.
-35-
<PAGE>
The Parties have executed this Agreement as of the day and year
first above written.
TEMPO SATELLITE, INC.
By:___________________________________
Name:_________________________________
Title:________________________________
TELESAT CANADA
By:___________________________________
Name:_________________________________
Title:________________________________
-36-
<PAGE>
SCHEDULE 1
----------
TELESAT REQUIRED CONSENTS
-------------------------
1. Radio Authorization
2. CRTC
3. Approval of the Board of Directors of Telesat
<PAGE>
SCHEDULE 2
----------
TEMPO REQUIRED CONSENTS
-----------------------
1. License from FCC to uplink or other uplinking arrangements
2. Export license
3. Approval of the Board of Directors of Tempo and TCI
<PAGE>
SCHEDULE 3
----------
TELESAT PROCEEDINGS AND JUDGMENTS
---------------------------------
None.
<PAGE>
SCHEDULE 4
----------
TEMPO PROCEEDINGS AND JUDGMENTS
-------------------------------
None.
<PAGE>
SCHEDULE 5
----------
CONFLICTS
---------
Capacity Purchase Agreement dated as of the 16th day of September, 1994 by and
among Tele-Communications, Inc., Advanced Communications Corporation ("ACC"),
and Daniel H. Garner, sole shareholder of ACC.
<PAGE>
EXHIBIT A
---------
AMENDMENT NO. 13 TO THE BSS CONSTRUCTION AGREEMENT
---------------------------------------------------
<PAGE>
EXHIBIT B
---------
ASSIGNMENT
----------
This Assignment (this "Assignment") is made as of the ____ day of
____________, 199__, by Tempo Satellite, Inc., an Oklahoma corporation
("Assignor"), in favor of Telesat Canada, a corporation continued and existing
under the laws of Canada ("Assignee").
RECITALS
This Assignment is delivered pursuant to the requirements of the
satellite purchase agreement dated as of May 6, 1996 between Assignor and
Assignee (the "Satellite Purchase Agreement"). Capitalized terms not otherwise
defined herein shall have the meanings given to such terms in the Satellite
Purchase Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the consideration specified in the Satellite
Purchase Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Assignor does hereby convey,
grant, bargain, sell, transfer, and assign unto Assignee, its successors and
assigns, all of the right, title and interest of Assignee in and to [the First
Successfully Delivered Satellite][the Second Successfully Delivered Satellite]
and the Deliverable Items transferred to Assignor on or before the first Closing
Date by Loral, free and clear of all Encumbrances, except Permitted
Encumbrances.
ANY AND ALL EXPRESS AND IMPLIED WARRANTIES WITH RESPECT TO THE
SATELLITES, THE TRANSPONDERS THEREON, AND THE DELIVERABLE ITEMS, INCLUDING, BUT
NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PURPOSE OR USE,
ARE EXPRESSLY EXCLUDED AND DISCLAIMED.
Nothing contained in this Assignment shall increase the liability of
Assignor to Assignee beyond the liability that Assignor has under the Satellite
Purchase Agreement and any action brought by Assignee with respect to this
Assignment shall be subject to the limitations on liabilities and remedies set
forth in the Satellite Purchase Agreement.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Assignment
effective as of the date first written above.
ASSIGNOR:
TEMPO SATELLITE, INC.
By:
----------------------------------------
Name:
--------------------------------------
Title:-------------------------------------
<PAGE>
EXHIBIT C
---------
TERM SHEET
----------
PROJECTS: Purchase and operation of a Direct Broadcast Satellite System in
- --------
the 82 degrees W.L. orbital position with short-term use of the second,
successful satellite in the 91 degrees W.L. orbital position.
PARTICIPANTS:Telesat Canada, TCI Technology Ventures, Inc. ("TCI"), Tempo
- ------------
Satellite, Inc. ("Tempo"), Canadian Participant #1, Telquest Inc., Canadian
Participant #2
CONCEPT: Telesat Canada and TCI will negotiate in good faith to enter into
- -------
an agreement with respect to the short-term use of the second, successful
satellite in the 91 degrees W.L. orbital position by Telesat, such agreement to
contain substantially the financial terms set forth in this Term Sheet (as such
terms relate to Telesat Canada and TCI) and such other terms and conditions as
are customary in transactions of the type contemplated by this Term Sheet and
are consistent with the relevant terms and conditions in the Operating Services
Agreement. Neither TCI nor Tempo will be a party to the agreements or
transactions described herein insofar as they relate to Canadian Participant #1,
Canadian Participant #2 or Telquest, such transactions being described herein
for convenience. TCI's obligations under the Operating Services Agreement will
not increase as a result of the transactions between TCI and Telesat described
herein. Telesat Canada, TCI and Tempo will negotiate in good faith such
modifications to the Satellite Purchase Agreement and the Operating Services
Agreement as may be required to effect the result that the obligations of the
parties to such agreements with respect to the Satellite being launched into the
91 degrees West orbital slot will, except with respect to financial terms,
mirror the obligations such parties have under the Satellite Purchase Agreement
and the Operating Services Agreement with respect to the Satellite being
launched into the 82 degrees West orbital slot.
SATELLITES: DBS I Launch in November, 1996 to be located at 82 degrees.
- ----------
DBS II Launch in February, 1997 to initially be located at 91
degrees (if DBS I Launch is successful) and relocated to 82 degrees before July,
1999. Telesat will use its best efforts to provide a Telesat satellite at 91
degrees as early as possible.
OWNERSHIP: TCI 27 transponders on each of DBS I and DBS II
- ---------
Canadian Participant #1 5 transponders on each of DBS I and DBS II
Telesat Canada Satellite Bus Operator
GUARANTEE SATELLITE: Telesat Canada will retain a security interest in the
- -------------------
transponders to be sold to TCI and Canadian Participant #1 and will have a
parental guarantee from TCI as defined in the Operating Services Agreement.
<PAGE>
INVESTMENT: Assuming total system cost of [*****] including all construction
- ----------
cost, financing charges, etc. as defined in the Satellite Purchase Agreement:
<TABLE>
<CAPTION>
<S> <C>
DBS I
-----
TCI [*****]
Canadian Participant #1 [*****]
Telesat Canada [*****]
-------
[*****]
DBS II
------
TCI [*****]
Canadian Participant #1 [*****]
Telesat Canada [*****]
-------
[*****]
</TABLE>
INVESTMENT PAYMENTS: DBS I (1) Telesat shall pay Tempo Satellite [*****] upon
- ------------------- -----
delivery of the in-orbit satellite (2) Simultaneously, TCI shall pay Telesat
[*****] for 27 transponders and Canadian Participant #1 shall pay Telesat
[*****] for 5 transponders.
DBS II (1) Telesat shall pay Tempo Satellite [*****]
------
million upon delivery of the in-orbit satellite (2) Simultaneously, TCI shall
pay Telesat [*****] million for 27 transponders and Canadian Participant #1
shall pay Telesat [*****] for 5 transponders.
QUARTERLY PAYMENTS TO TELESAT CANADA
<TABLE>
<CAPTION>
<S> <C>
DBS I
-----
TCI [*****]
Canadian Participant #1 [*****]
DBS II
------
TCI [*****]
Canadian Participant #1 [*****]
</TABLE>
INTERIM (LEASE) ARRANGEMENTS: DBS II - For a period beginning with the
- ---------------------------- ------
operational date of the satellite at 91 degrees and ending on or before July 1,
1999, TCI and Canadian Participant #1, shall provide (lease), to Telesat, 32 low
power transponders in the 91 degrees W.L. position:
TCI 27 low-power transponders
Canadian Participant #1 5 low-power transponders
<PAGE>
For a period beginning with the operational date of the satellite at 91 degrees
and ending on or before July 1, 1999, Telesat shall provide (lease), to Telquest
and Canadian Participant #2, 32 low power transponders:
Telquest 22 low-power transponders
Canadian Participant #2 10 low-power transponders
In the event of a failure of 10 or more transponders on DBS I, TCI/Canadian
Participant #1 shall have the right to pre-empt Telesat's use of the 32 low-
power transponders.
LEASE PAYMENTS: DBS II - For a period beginning with the operational date of
- -------------- ------
the satellite at 91 Degrees and ending on or before July 1, 1999 Telesat shall
make quarterly lease payments as follows:
<TABLE>
<S> <C>
TCI [*****]
Canadian Participant #1 [*****]
</TABLE>
<PAGE>
EXHIBIT D
---------
LORAL SIDE AGREEMENT
--------------------
<PAGE>
EXHIBIT 4.5
THIS DOCUMENT HAS BEEN REDACTED IN ACCORDANCE WITH RULE 24B-2(b) UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. A COMPLETE COPY OF THIS EXHIBIT,
WITHOUT OMISSIONS, HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
OMISSIONS ARE INDICATED HEREIN WITH [*****].
================================================================================
OPERATING SERVICES AGREEMENT
BY AND BETWEEN
TCI TECHNOLOGY VENTURES, INC.
AND
TELESAT CANADA
DATED AS OF MAY 6, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 1. Definitions.............................................1
1.1 Affiliate.........................................2
1.2 Business Day......................................2
1.3 Canadian DBS Provider.............................2
1.4 Closing...........................................2
1.5 Closing Date......................................2
1.6 Confidential Information..........................2
1.7 Construction Financing Agreements.................2
1.8 CRTC..............................................3
1.9 DBS...............................................3
1.10 Deliverable Items.................................3
1.11 Dollars ($).......................................3
1.12 Encumbrance.......................................3
1.13 FCC...............................................3
1.14 First Closing.....................................3
1.15 First Launched Satellite..........................3
1.16 First Successfully Delivered Satellite............3
1.17 Force Majeure.....................................3
1.18 Governmental Authority............................3
1.19 Industry Canada...................................4
1.20 Legal Requirement.................................4
1.21 Loral Side Agreement..............................4
1.22 Performance Specifications........................4
1.23 Permitted Encumbrances............................4
1.24 Person............................................4
1.25 Primestar.........................................4
1.26 Purchase Price of First Successfully Delivered
Satellite.........................................4
1.27 Purchase Price of Second Successfully
Delivered Satellite...............................5
1.28 Radio Authorization...............................6
1.29 Required Consents.................................6
1.30 Satellite Failure.................................6
1.31 Satellite Purchase Price..........................7
1.32 Second Closing....................................7
1.33 Second Launched Satellite.........................7
1.34 Second Successfully Delivered Satellite...........7
1.35 Spare TWTA........................................7
1.36 Successful Delivery...............................7
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
1.37 Telesat Access Requirements.......................7
1.38 Telesat Agreements................................7
1.39 Telesat Insurance.................................7
1.40 Telesat Required Consents.........................7
1.41 Telesat Share.....................................8
1.42 Tempo Required Consents...........................8
1.43 Third Party.......................................8
1.44 Third Party Offer.................................8
1.45 Transfer..........................................8
1.46 Transponder.......................................8
1.47 Transponder Failure...............................8
1.48 Transponder Purchase Price........................9
1.49 TWTA Spurious Switch-Off ("TSSO").................9
1.50 Other Definitions................................10
Section 2. Interim Use and Operation of Satellites;
Options Regarding 32 Transponder Mode..................11
2.1 Operation of First Successfully Delivered
Initial Designation by TCI of 16 Transponder Mode
or 32 Transponder Satellite Pending First Closing;
Mode.............................................11
2.2 Use of First Successfully Delivered Satellite
Pending First Closing............................12
2.3 Option Regarding Conversion to 32 Transponder
Closing Mode Following First Closing.............12
2.4 Delivered Satellite Pending......................13
Section 3. Designation of Telesat Transponders....................14
3.1 Designation of Telesat Transponders..............14
Section 4. Purchase and Sale of Satellite Transponders............14
4.1 Purchase and Sale of Transponders on First
Successfully Delivered Satellite.................14
4.2 Title to, and Status of, TCI Transponder.........15
4.3 Payment of Transponder Purchase Price............15
Section 5 Term...................................................16
Section 6. Telesat Transponders...................................16
6.1 Sale of Telesat Transponders to Canadian DBS
Providers........................................16
6.2 Newly Available Telesat Transponders.............17
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
6.3 Sale of Telesat Transponders to Third Parties
Pursuant to Right of First Refusal...............18
6.4 Treatment of Transferred Telesat Transponders....18
Section 7. Operation of Satellite.................................19
7.1 Operation of the Satellite.......................19
7.2 Compliance with Law..............................19
7.3 Operating Costs..................................19
7.4 Satellite Operations.............................19
7.5 Telesat Reports..................................20
7.6 Payment of Operating Fees........................20
7.7 Prepaid Operating Fees; Warranty Paybacks;
Payments in Respect of Resurrected Transponders..22
7.8 Effect of Satellite or Transponder Failure.......23
7.9 Guarantee........................................24
7.10 Payments after Completion of Operating Fees......25
Section 8. Use of TCI Transponders................................25
8.1 Use of TCI Transponders..........................25
8.2 Encryption.......................................25
8.3 Radio Transmissions..............................25
8.4 Frequency Plans..................................25
8.5 Uplinking........................................26
8.6 Content of Communications........................26
8.7 Compliance with Law..............................26
8.8 Compliance with Telesat Access Requirements......26
Section 9. Transponder Restoration Procedures.....................26
9.1 Designated TWTs..................................26
9.2 Notice of Transponder Failure....................26
9.3 Use of Spare TWTAs...............................26
9.4 Continued Use of Failed Transponder..............27
Section 10. Representations and Warranties of Telesat..............27
10.1 Organization and Qualification...................27
10.2 Authority and Validity...........................27
10.3 No Breach or Violation...........................28
Section 11. Representations and Warranties of TCI..................28
11.1 Organization.....................................28
</TABLE>
(iii)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
11.2 Authority and Validity...........................28
11.3 No Breach or Violation...........................29
Section 12. Warranties and Limitation of Liability.................29
12.1 Disclaimer of Warranties and Limitation of
Liablity.........................................29
12.2 Injunctive Relief................................29
12.3 Negligent Operation of the Satellite.............30
12.4 Force Majeure....................................30
12.5 Limitation of Liability..........................30
Section 13. Additional Covenants...................................31
13.1 Conduct of Business..............................31
13.2 Maintenance of Required Consents.................31
13.3 Notification of Certain Matters..................32
13.4 Transfer Taxes...................................32
13.5 Satisfaction of Conditions.......................32
13.6 Confidentiality Regarding Terms and Existence
Informationof Agreement; Confidential
13.7 No Liens, Use or Transfer........................34
13.8 No Merger, etc...................................34
13.9 Satellite Failure; Successor Satellites;
of a Single Satellite Replacement Satellites and
Operation........................................34
13.10 Insurance........................................35
13.11 Warranty Payback Claims Against Loral............36
13.12 Warranty Claims Against Loral....................37
13.13 Indemnity Claims Against Loral...................38
13.14 Exhibits.........................................39
Section 14 Closing................................................39
Section 15. Conditions to Closing..................................39
15.1 Conditions to the Obligations of the Parties.....39
15.2 Conditions to Obligations of TCI.................39
15.3 Conditions to Obligations of Telesat.............40
Section 16. Termination............................................40
16.1 Termination Prior to First Closing...............40
16.2 Termination Following First Closing..............40
16.3 Liabilities in Event of Termination..............40
16.4 Post-Closing Termination by Telesat..............40
</TABLE>
(iv)
<PAGE>
<TABLE>
Page
----
<S> <C> <C> <C>
16.5 Post-Closing Termination by TCI..................42
16.6 Rights and Remedies..............................42
Section 17. Indemnification........................................43
17.1 Indemnification by Telesat.......................43
17.2 Indemnification by TCI...........................43
17.3 Third Party Claims...............................44
Section 18. Miscellaneous..........................................45
18.1 Private Parties..................................45
18.2 Parties Obligated and Benefited..................45
18.3 Notices..........................................46
18.4 Attorneys' Fees..................................47
18.5 Right to Specific Performance....................47
18.6 Waiver...........................................47
18.7 Captions.........................................47
18.8 Choice of Law....................................47
18.9 Terms............................................48
18.10 Rights Cumulative................................48
18.11 Further Actions..................................48
18.12 Time.............................................48
18.13 Counterparts.....................................48
18.14 Entire Agreement.................................49
18.15 Severability.....................................49
18.16 Construction.....................................49
18.17 Expenses.........................................49
18.18 Counting of Days.................................49
18.19 Waiver of Tax Warranties.........................49
18.20 Characterization of this Transaction.............50
18.21 Quiet Enjoyment..................................50
18.22 No Joint Venture.................................50
</TABLE>
(v)
<PAGE>
LIST OF EXHIBITS
EXHIBITS
A - Assignment Agreement
B - Guarantee
C - Telesat Access Requirements
D - Amortization Schedule
E - Security Agreement
F - TT&C Plan
(vi)
<PAGE>
OPERATING SERVICES AGREEMENT
----------------------------
This Operating Services Agreement (this "Agreement") is made as of the
6th day of May, 1996, by and between TCI Technology Ventures, Inc., a Delaware
corporation ("TCI"), on the one hand, and Telesat Canada, a corporation
continued and existing under the laws of Canada ("Telesat") on the other (each
of TCI and Telesat being referred to individually as a "Party" and collectively
as the "Parties").
RECITALS
--------
A. Tempo Satellite, Inc., an Oklahoma corporation ("Tempo") has
entered into Contract No. TPO-1-290 as amended and restated in its entirety by
Contract Amendment No. 4, as further amended by Amendments No. 5 through No. 13
and any other amendments hereafter entered into (Amendments No. 5 through No. 13
and any additional amendments being separately referred to herein from time to
time as the "Amendments," and, together with Contract Amendment No. 4, as the
"BSS Construction Agreement") with Space Systems/Loral, Inc. ("Loral"), which
agreement provides for the construction, launch and deployment of two satellites
which together will contain transponder capacity appropriate for the broadcast
of 32 channels at the 82 West orbital location (each, a "Satellite" and
together, the "Satellites").
B. Tempo and Telesat have entered into a Satellite Purchase Agreement
dated of even date herewith (the "Satellite Purchase Agreement") which provides
for the sale of the Satellites to Telesat in exchange for the consideration
specified therein.
C. TCI and Telesat desire to enter in this Agreement to provide for
the sale by Telesat to TCI of specified transponders on the Satellites upon
closing of the Satellite Purchase Agreement in exchange for the Transponder
Purchase Price and the operation and maintenance by Telesat of the Satellites in
connection with the use by TCI of its Transponders in return for the
consideration specified herein.
AGREEMENT
---------
In consideration of the above recitals and the mutual agreements
stated in this Agreement, the Parties agree as follows:
SECTION 1. DEFINITIONS.
Unless otherwise defined in this Agreement, capitalized terms used
herein shall have the respective meanings set forth in the Satellite Purchase
Agreement. In addition to terms defined elsewhere in this Agreement, the
following terms with initial capital letters, when used in this Agreement, will
have the meanings set forth below:
<PAGE>
1.1 Affiliate. With respect to any Person, any other Person
---------
controlling, controlled by, or under common control with, such Person, with
"control" for such purpose meaning the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities or voting interests,
by contract or otherwise.
1.2 Business Day. Any day other than Saturday, Sunday or a day on
------------
which banking institutions in Toronto, Ontario or in Denver, Colorado are
required or authorized to be closed.
1.3 Canadian DBS Provider. A Canadian company providing, or at the
---------------------
relevant time providing, direct broadcast satellite services in, but not limited
to, Canada.
1.4 Closing. The First Closing and/or the Second Closing, as
-------
applicable.
1.5 Closing Date. The First Closing Date and/or the Second Closing
------------
Date, as applicable.
1.6 Confidential Information. All information disclosed by one
------------------------
Party to the other Party or its Affiliates in connection with this Agreement,
including information provided pursuant to the Non-Disclosure Agreement dated as
of November 23, 1995; provided, that such information shall satisfy the
following criteria in order to constitute "Confidential Information": if
disclosed in written or other tangible format, such information shall be
accompanied by reasonably prominent "Confidential" or similar legends; or if
disclosed orally or by way of observation, such information shall be described
by the disclosing Party as Confidential Information at the time of disclosure,
and shall be confirmed as such in a written memorandum sent to the other Party
within 30 days after such disclosure. Notwithstanding the foregoing, the term
"Confidential Information" shall not include any information which: (v) was
previously known to the Party receiving such Confidential Information if such
Party can prove such prior knowledge by bona fide documentation dated prior to
the time of disclosure by the disclosing Party and the receiving Party did not
learn such information from a person whom the receiving Party knew was under a
duty to the disclosing Party not to disclose the information; or (w) is or
becomes part of the public domain; or (x) the receiving Party receives from an
independent third party whom the receiving Party knows is under no obligation to
the disclosing Party not to disclose it; or (y) is independently developed by
the receiving Party as evidenced by documentation dated prior to the time of
disclosure by the disclosing Party.
1.7 Construction Financing Agreements. (a) Credit Agreement dated
---------------------------------
as of March 9, 1994 among Primestar, The Bank of New York, Chemical Bank and
Citibank, N.A., as Managing Agent, the Bank of New York as Documentation Agent,
Chemical Bank as Administrative Agent and the Banks signatory thereto, as
amended or extended and (b) any other credit facility or arrangement the
proceeds of which are used to finance or refinance the payment of any item
included in the Satellite Purchase Price, including any third-party replacement
or
-2-
<PAGE>
supplemental credit facility to the credit agreement referred to in paragraph
(a) and including any internal financing arrangement which is at rates and on
terms no less favorable to the borrower than those contained in either the
credit agreement referred to in paragraph (a) or in any third-party replacement
or supplemental credit agreement to the credit agreement referred to in
paragraph (a).
1.8 CRTC. Canadian Radio-television and Telecommunications
----
Commission.
1.9 DBS. Direct Broadcast Service.
---
1.10 Deliverable Items. As defined in the BSS Construction
-----------------
Agreement; provided, that Deliverable Items for purposes of this Agreement does
not include the Satellites or any additional satellites ordered or deliverable
under the BSS Construction Agreement.
1.11 Dollars ($). All references herein to "Dollars" or "$" shall be
-----------
deemed to be references to United States dollars.
1.12 Encumbrance. Any mortgage, lien, security interest, security
-----------
agreement, conditional sale or other title retention agreement, limitation,
pledge, option, charge, assessment, restrictive agreement, restriction,
encumbrance, adverse interest, restriction on transfer or any exception to or
defect in title or other ownership interest (including reservations, rights of
way, possibilities of reverter, restrictive covenants, leases and licenses).
1.13 FCC. The Federal Communications Commission.
---
1.14 First Closing. The consummation of the transactions
-------------
contemplated by Section 4.1, the date of which is referred to as the First
Closing Date.
1.15 First Launched Satellite. The first satellite that Loral
------------------------
attempts to launch under the BSS Construction Agreement, whether or not
Successfully Delivered.
1.16 First Successfully Delivered Satellite. The first Satellite
--------------------------------------
launched pursuant to the BSS Construction Agreement which is accepted by Tempo
pursuant to Section 10.2 or Section 10.3 of the BSS Construction Agreement,
including, if applicable, a replacement Satellite as contemplated by Section
10.4 of the BSS Construction Agreement.
1.17 Force Majeure. Acts of God; meteors; fire, flood, weather, or
-------------
other catastrophes; other circumstances in the space environment over which the
Parties have no control; Legal Requirements arising after the date of this
Agreement; national emergencies, insurrections, riots, wars, or strikes,
lockouts, work stoppages or other labor difficulties.
1.18 Governmental Authority. (i) The United States of America, (ii)
----------------------
Canada, (iii) any state, commonwealth, territory, province or possession of the
United States of America
-3-
<PAGE>
or of Canada and any political subdivision thereof (including counties,
municipalities and the like), (iv) any foreign (as to the United States of
America or Canada) sovereign entity and any political subdivision thereof or (v)
any agency, authority or instrumentality of any of the foregoing, including any
court, tribunal, department, bureau, commission or board.
1.19 Industry Canada. A department of the Federal Government of
---------------
Canada which has, among other things, the responsibility for assigning the
Canadian orbital slots.
1.20 Legal Requirement. Any applicable statute, ordinance, code,
-----------------
law, rule, regulation, order or other requirement, standard or procedure, in
each case to the extent having the force of law, enacted, adopted or applied by
any Governmental Authority, including judicial decisions applying common law or
interpreting any other Legal Requirement.
1.21 Loral Side Agreement. The memorandum of agreement to be
--------------------
entered into among Tempo, Loral and Telesat, as amended or extended.
1.22 Performance Specifications. The Satellite performance
--------------------------
specifications defined in the BSS Construction Agreement, as amended.
1.23 Permitted Encumbrances. Rights reserved to any Governmental
----------------------
Authority to regulate the Satellites.
1.24 Person. Any natural person, corporation, partnership, trust,
------
unincorporated organization, association, limited liability company,
Governmental Authority or other entity.
1.25 Primestar. Primestar Partners, L.P., a Delaware limited
---------
partnership.
1.26 Purchase Price of First Successfully Delivered Satellite. An
--------------------------------------------------------
amount equal to the aggregate of the following:
(a) all amounts paid or payable to Loral under the BSS
Construction Agreement with respect to (i) the First Successfully Delivered
Satellite (which shall include 50% of any amounts paid or payable under the
Amendments and 50% of any other amounts paid or payable under the BSS
Construction Agreement which are not attributable to a specific Satellite)
[******] payable under Article 13 of the BSS Construction Agreement) and (ii)
Items 3 and 4 described in Section 4.1 of the BSS Construction Agreement;
(a) all amounts paid or payable under the Telesat Agreements
with respect to the period up to and including the date that is 10 days prior to
the First Closing Date;
- 4 -
<PAGE>
(c) 50% of interest charges and other financing costs paid or
payable by Tempo, Primestar or their respective Affiliates under the
Construction Financing Agreements with respect to the period up to and including
the date that is 10 days prior to First Closing Date; and
(d) [*****] representing amounts paid by Tempo, Primestar or
their respective Affiliates to Loral prior to execution of the BSS Construction
Agreement in connection with the Satellites;
less
(i) the amount of any damages paid to Tempo, Primestar
or their respective Affiliates by Loral pursuant to Article 23 of the BSS
Construction Agreement in respect of the First Successfully Delivered Satellite;
(ii) the amount of any [*****] of the BSS Construction
Agreement in respect of the First Successfully Delivered Satellite prior to the
First Closing Date;
(iii) the amount of any reimbursement by Loral to Tempo,
Primestar or their respective Affiliates pursuant to Article 21 of the BSS
Construction Agreement in respect of the First Successfully Delivered Satellite;
provided, that no reduction shall be made in respect of any payment by Loral for
alternative satellite facilities acquired by Tempo as a result of a delay in
Satellite delivery; and
(iv) any late payment or interest charges and any other
amounts paid by Tempo, Primestar or their respective Affiliates under either the
BSS Construction Agreement or any Construction Financing Agreement as a result
of a default under any such agreement.
1.27 Purchase Price of Second Successfully Delivered Satellite. An
---------------------------------------------------------
amount equal to the aggregate of the following:
(a) all amounts paid or payable to Loral under the BSS
Construction Agreement [*****] payable under Article 13 of the BSS Construction
Agreement);
(b) all amounts paid or payable to Telesat under the Telesat
Agreements; and
(c) all interest charges and other financing costs paid or
payable by Tempo, Primestar or their respective Affiliates under the
Construction Financing Agreements;
-5-
<PAGE>
in each case to the extent not previously paid by Telesat as part of the
Purchase Price of First Successfully Delivered Satellite;
less
(i) the amount of any damages paid to Tempo, Primestar
or their respective Affiliates by Loral pursuant to Article 23 of the BSS
Construction Agreement;
(ii) the amount of any [*****] of the BSS Construction
Agreement in respect of the Second Successfully Delivered Satellite prior to the
Second Closing Date;
(iii) the amount of any reimbursement by Loral to Tempo,
Primestar or their respective Affiliates pursuant to Article 21 of the BSS
Construction Agreement; provided, that no reduction shall be made in respect of
any payment by Loral for alternative satellite facilities acquired by Tempo as a
result of a delay in Satellite delivery; and
(iv) any late payment or interest charges and any other
amounts paid by Tempo, Primestar or their respective Affiliates under either the
BSS Construction Agreement or any Construction Financing Agreement as a result
of a default under any such agreement;
in each case to the extent not applied in reduction of part of the Purchase
Price of First Successfully Delivered Satellite.
1.28 Radio Authorization. The authorization of the Minister of
-------------------
Industry (Canada) pursuant to the Radiocommunication Act (Canada) to use the
broadcast satellite system position at the 82 West orbital location.
1.29 Required Consents. The Telesat Required Consents and the Tempo
-----------------
Required Consents.
1.30 Satellite Failure. A Satellite Failure shall be deemed to have
-----------------
occurred with respect to a Satellite when (a) the Satellite no longer has
sufficient fuel to perform north/south station keeping maneuvers, while
maintaining an appropriate fuel reserve for decommissioning; or (b) at any point
in time there are fewer than (i) eight transponders on the Satellite which meet
the Performance Specifications if the Satellite is operating in the 16
transponder mode or (ii) 16 transponders on the Satellite which meet the
Performance Specifications if the Satellite is operating in the 32 transponder
mode; or (c) Telesat and TCI have mutually agreed to declare the Satellite a
Satellite Failure.
-6-
<PAGE>
1.31 Satellite Purchase Price. The Purchase Price of First
------------------------
Successfully Delivered Satellite or the Purchase Price of Second Successfully
Delivered Satellite, as applicable.
1.32 Second Closing. The consummation of the transactions
--------------
contemplated by Section 4.2, the date of which is referred to as the Second
Closing Date.
1.33 Second Launched Satellite. The second satellite that Loral
-------------------------
attempts to launch under the BSS Construction Agreement, whether or not
Successfully Delivered.
1.34 Second Successfully Delivered Satellite. The second Satellite
---------------------------------------
launched pursuant to the BSS Construction Agreement which is accepted by Tempo
pursuant to Section 10.2 or Section 10.3 of the BSS Construction Agreement,
including, if applicable, a replacement Satellite as contemplated by Section
10.4 of the BSS Construction Agreement.
1.35 Spare TWTA. Certain redundant transponder equipment units, as
----------
described in the Performance Specifications, which are designed as substitutes
for equipment component units in use, the failure of which equipment component
units in use could cause a transponder to fail to meet the Performance
Specifications.
1.36 Successful Delivery. A Satellite has been launched and
-------------------
accepted by Tempo pursuant to Section 10.2 or Section 10.3 of the BSS
Construction Agreement.
1.37 Telesat Access Requirements. The Access Requirements attached
---------------------------
hereto as EXHIBIT C.
1.38 Telesat Agreements. The following agreements between Telesat
------------------
and Tempo: (a) Consulting Agreement dated as of November 16, 1990, and amended
as of June 1, 1991 and September 28, 1992, (b) Technical Assistance Agreement
dated as of December 31, 1992 and (c) Consulting Agreement dated as of August
12, 1993.
1.39 Telesat Insurance. Any insurance obtained by Telesat on the
-----------------
Satellites or the Telesat Transponders.
1.40 Telesat Required Consents. All notifications, licenses,
-------------------------
permits, authorizations, approvals and consents under Legal Requirements and
other third-party consents, (including, without limiting the generality of the
foregoing, any Industry Canada and CRTC requirements, notifications, licenses,
authorizations, approvals and or consents), required for Telesat to consummate
the transactions contemplated by, and to perform its obligations under, the
Satellite Purchase Agreement and this Agreement, including those required for
(a) Telesat to permit the transactions described in Section 2 hereof, (b)
Telesat to purchase the Satellites and to thereafter own and operate the
Satellites, and (c) Telesat to sell transponders on the Satellites to TCI in
accordance with the terms of this Agreement and TCI to purchase and use such
-7-
<PAGE>
transponders under Canadian Legal Requirements to transmit television
programming and other services into the United States; provided, that any
notifications, licenses, permits, authorizations, approvals and consents
required under United States Legal Requirements for TCI to so purchase and use
such transponders are Tempo Required Consents, not Telesat Required Consents.
1.41 Telesat Share. [*****]
-------------
1.42 Tempo Required Consents. All notifications, licenses,
-----------------------
permits, authorizations, approvals and consents under Legal Requirements and
other third-party consents (including, without limiting the generality of the
foregoing, any FCC requirements, notifications, licenses, authorizations,
approvals and or consents) required for Tempo to consummate the transactions
contemplated by, and to perform its obligations under, the Satellite Purchase
Agreement and TCI to consummate the transactions contemplated by, and to perform
its obligations under, this Agreement, including those required for (a) Tempo to
sell the Satellites to Telesat, and (b) TCI to purchase transponders on the
Satellites in accordance with the terms of this Agreement and to use such
transponders to transmit television programming and other services into the
United States; provided, that any notifications, licenses, permits,
authorizations, approvals and consents required under Canadian Legal
Requirements for TCI to so purchase and use such transponders are Telesat
Required Consents, not Tempo Required Consents.
1.43 Third Party. With respect to any Person, a Person other than
-----------
an Affiliate of such Person.
1.44 Third Party Offer. A bona fide, non-collusive, binding,
-----------------
arms'-length written offer from a Third Party to purchase or lease any portion
of the Telesat Transponders, stated in terms of U.S. dollars.
1.45 Transfer. A sale, lease, exchange, assignment or other
--------
disposition, whether voluntary or by operation of law.
1.46 Transponder. That portion of the communications subsystem
-----------
between the receive antenna output port and transmit antenna input port,
including any redundancy switching and a traveling wave tube amplifier (TWTA)
(subject to the conditions of Section 9), which provides an individual
communications transmission path for a 24 MHz channel.
1.47 Transponder Failure. A Transponder Failure means: (a) a
-------------------
Transponder fails to meet the Performance Specifications for a cumulative period
of more than ten hours during any consecutive 30 day period, or (b) 20 or more
"outage units" (as defined below) occur within a consecutive 30 day period with
respect to a Transponder, or (c) a Transponder fails to meet the Performance
Specifications for a period in excess of 30 seconds per day for a period of 30
days, or (d) a Transponder fails to meet the Performance Specifications for any
period of time under circumstances that make it clearly ascertainable or
predictable technically that a failure set
-8-
<PAGE>
forth in either (a) or (b) or (c) of this definition will occur. An "outage
unit" shall mean the failure of a Transponder to meet the Performance
Specifications for 15 minutes or more in one day. Notwithstanding the foregoing,
the occurrence of fewer than ten TWTA Spurious Switch-Offs or 30 micro-discharge
events (i.e., a very short unwanted interruption of the transponder RF signal)
----
with respect to a Transponder in a consecutive 60 day period shall not
constitute a Transponder Failure.
1.48 Transponder Purchase Price.
--------------------------
(a) Subject to Sections 1.48(b) and (c), the Transponder
Purchase Price for each Satellite will be an amount equal to:
[*****]
(b) If the First Successfully Delivered Satellite is being
operated in the 16 transponder mode at the time it is sold to Telesat, the
Transponder Purchase Price in respect of the First Successfully Delivered
Satellite will be an amount equal to:
[*****]
(c) If the First Successfully Delivered Satellite is being operated
in the 16 transponder mode at the time the Second Successfully Delivered
Satellite is sold to Telesat pursuant to Section 3.2 of the Satellite Purchase
Agreement, the Transponder Purchase Price in respect of the Second Successfully
Delivered Satellite will be an amount equal to:
[*****]
1.49 TWTA Spurious Switch-Off ("TSSO"). For the purposes of
---------------------------------
defining a successful operating channel, with no interruptions to traffic on
that channel, a TSSO is defined as any unwanted shut-off of a TWTA due to the
automatic protection circuitry in its EPC. This EPC design contains an automatic
reset unit ("ARU") that provides EPC operation within 300mS of a microdischarge
event. If no other microdischarge event occurs within the next three minutes,
the ARU will reset itself automatically. Two microdischarge events occurring
within a three minute ARU interval on the same EPC may trigger a spurious switch
off shutting down the EPC. If the ARU shuts down the EPC, causing the loss of
the transponder TWTA function, the EPC and hence the TWTA must be restarted by
ground command. The EPC timer will automatically apply the high voltage after
five minutes and the TWTA will be back in service. In high power mode, TWTA
shut-down includes shut-down of either one or both of the parallel combined
traveling wave tubes ("TWT"). In medium power mode, TWTA shut-down is the shut-
down of the one
-9-
<PAGE>
shut-down of the one operating TWT. A microdischarge event is any very short
unwanted interruption of the Transponder RF signal. The micro-discharge event
period is typically 1-50 mS duration.
1.50 Other Definitions. The following terms are defined in the
-----------------
Sections indicated:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Action 17.3
Agreement Preamble
Amendments Recitals
Annual Insurance Coverage 7.6(g)
ARU 1.49
Assignee 18.2
Assignment Agreement 4.2
Average Present Value Amount 7.6(g)
BSS Construction Agreement Recitals
Cost Per Transponder 6.1(b)(i)
Cost Per Transponder on a Quarterly
Basis 6.1(b)(i)
First Interim Period 2.1(a)
Guarantee 7.9(a)
Indemnified Party 17.3
Indemnifying Party 17.3
Initial Secured Amount 7.9(b)
Intellectual Property Injunction 13.13(c)
Loral Recitals
Loral Guarantor 13.11(a)
Loral Indemnity Claim 13.13(a)
Loral Warranty Claim 13.12(a)
Maximum Secured Amount 7.9(b)
net insurance proceeds 7.8(b)
Newly Available Telesat Transponder 6.2
Operating Fees 7.6(a)
Operating Fees Per Transponder 6.1(b)(ii)
outage unit 1.47
Party or Parties Preamble
Prepaid Operating Fees 7.7(a)
QTPT/48 6.1(b)(ii)
Satellite or Satellites Recitals
Satellite Purchase Agreement Recitals
Second Interim Period 2.4
</TABLE>
-10-
<PAGE>
<TABLE>
<S> <C>
TCI Indemnitees 17.1
TCI Option 6.2
TCI Transponders 4.1(a) & (b)
Tele-Communications 7.9(a)
Telesat Preamble
Telesat Indemnitees 17.2
Telesat Transponders 3.1(a)& (b)
Telesat Warranty Payback 7.7(b)
Tempo Recitals
Term 5
Time Differential 6.1(b)(ii)
TSSO 1.49
TT&C 7.4
Two-Channel Transponder Simulator 7.4
TWT 1.49
TWTA 1.46
Unused Telesat Transponder 6.1(a)
Warranty Claim Payments 13.12(c)
Warranty Paybacks 7.7(b)
Warranty Payback Claim 13.11(b)
</TABLE>
SECTION 2. INTERIM USE AND OPERATION OF SATELLITES; OPTIONS REGARDING 32
TRANSPONDER MODE.
2.1 Operation of First Successfully Delivered Satellite Pending
-----------------------------------------------------------
First Closing; Initial Designation by TCI of 16 Transponder Mode or
- -------------------------------------------------------------------
32 Transponder Mode.
- -------------------
(a) During the period beginning on the date of Successful
Delivery of the First Successfully Delivered Satellite and ending on the First
Closing Date (the "First Interim Period"), Telesat shall be responsible for
operating and maintaining the First Successfully Delivered Satellite in
accordance with the provisions of Section 7 of this Agreement. In consideration
of the operation and maintenance by Telesat of the First Successfully Delivered
Satellite during the First Interim Period, TCI shall pay to Telesat an amount
equal to [*****] Operating Fee payable pursuant to Section 7.6(b), the amount of
such quarterly Operating Fee to be initially estimated by TCI and Telesat in
good faith and to be prorated based on the actual number of days in the First
Interim Period. The payment provided for in this Section 2.1(a), as estimated,
shall be paid to Telesat by TCI on the first day of the First Interim Period. On
the First Closing Date, the amount due to Telesat hereunder will be recalculated
based on the actual quarterly Operating Fee payable pursuant to Section 7.6(b)
and TCI or Telesat, as applicable, will pay the amount owed to the other Party
on the First Closing Date; provided, that if a payment is due hereunder from
Telesat to TCI, such payment will be offset
-11-
<PAGE>
against the first Operating Fee payment due hereunder from TCI to Telesat in
respect of the First Successfully Delivery Satellite.
(b) At least 30 days prior to the launch of the First
Launched Satellite and, if the First Launched Satellite is not Successfully
Delivered, at least 30 days prior to the launch of each subsequent Satellite by
Loral until there is a Successful Delivery of a Satellite, TCI shall notify
Telesat whether it desires Telesat to initially operate such Satellite in the 16
Transponder mode (i.e., a high power mode, whether or not all 16 Transponders
----
are functioning) or the 32 Transponder mode (i.e., a medium power mode,
whether or not all 32 Transponders are functioning).
2.2 Use of First Successfully Delivered Satellite Pending First
-----------------------------------------------------------
Closing. During the period beginning on the date of Successful Delivery of the
First Successfully Delivered Satellite and ending on the First Closing Date, the
following provisions regarding use of the First Successfully Delivered Satellite
will apply:
(a) Telesat shall be entitled to the use of five
Transponders chosen by it on such Satellite if such Satellite is being operated
in the 32 Transponder mode (even if fewer than 32 Transponders are functioning),
such use to be subject to the requirements of Section 6 of this Agreement. TCI
will provide the In-Orbit Testing (as defined in the BSS Construction Agreement)
results with respect to the First Successfully Delivered Satellite to Telesat
within five days after Tempo's receipt of such results from Loral. Telesat shall
notify TCI in writing regarding which five Transponders it desires to use within
ten days following its receipt of the In-Orbit Testing results with respect to
such Satellite.
(b) Telesat shall be entitled to the use of two
Transponders chosen by it on such Satellite if such Satellite is being operated
in the 16 Transponder mode (even if fewer than 16 Transponders are functioning),
such use to be subject to the requirements of Section 6 of this Agreement. TCI
will provide the In-Orbit Testing (as defined in the BSS Construction Agreement)
results with respect to the First Successfully Delivered Satellite to Telesat
within five days after Tempo's receipt of such results from Loral. Telesat shall
notify TCI in writing regarding which two Transponders it desires to use within
ten days following its receipt of the In-Orbit Testing results with respect to
such Satellite.
(c) TCI shall be entitled to the use of all Transponders on
such Satellite not assigned to Telesat pursuant to Section 2.2(a) or (b), such
use to be subject to the requirements of Section 8 of this Agreement.
2.3 Option Regarding Conversion to 32 Transponder Mode Following
------------------------------------------------------------
First Closing. If the First Successfully Delivered Satellite is initially being
- -------------
operated in the 16 Transponder mode, TCI may instruct Telesat at any time prior
to the Second Closing Date, on ten days' notice, to commence operating the First
Successfully Delivered Satellite in the 32 Transponder mode for the remainder of
the Term or until a second Satellite is Successfully
-12-
<PAGE>
Delivered and a transition of services is accomplished. Following an election by
TCI to convert operation of the First Successfully Delivered Satellite from a 16
transponder mode to a 32 Transponder mode, three additional Transponders shall,
subject to the obligations of Telesat under Section 4.3 and 7.6(c) to make
refunds to TCI, be transferred to Telesat for no additional consideration and
will be included in the Telesat Transponders, as specified in Section 3.1(a).
2.4 Operation and Use of Second Successfully Delivered Satellite
------------------------------------------------------------
Pending Closing. During the period beginning on the date of Successful Delivery
- ---------------
of the Second Successfully Delivered Satellite and ending on the Second Closing
Date (the "Second Interim Period"), the following provisions regarding operation
and use of the Second Successfully Delivered Satellite will apply:
(a) Telesat shall be responsible for operating and
maintaining the Second Successfully Delivered Satellite in accordance with the
provisions of Section 7 of this Agreement. In consideration of the operation and
maintenance by Telesat of the Second Successfully Delivered Satellite during the
Second Interim Period, TCI shall pay to Telesat an amount equal to [*****]
Operating Fee payable pursuant to Section 7.6(e), the amount of such quarterly
Operating Fee to be initially estimated by TCI and Telesat in good faith and to
be prorated based on the actual number of days in the Second Interim Period. The
payment provided for in this Section 2.4(a), as estimated, shall be paid to
Telesat by TCI on the first day of the Second Interim Period. On the Second
Closing Date, the amount due to Telesat hereunder will be recalculated based on
the actual quarterly Operating Fee payable pursuant to Section 7.6(e) and TCI or
Telesat, as applicable, will pay the amount owed to the other Party on the
Second Closing Date; provided, that if a payment is due hereunder from Telesat
to TCI, such payment will be offset against the first Operating Fee payment due
hereunder from TCI to Telesat in respect of the Second Successfully Delivered
Satellite.
(b) From and after the date of Successful Delivery of the
Second Satellite, both Satellites shall be operated in the 16 Transponder mode
as a high power DBS system and Telesat shall be entitled to the use of five
Transponders on such Satellites chosen by it, such use to be subject to the
requirements of Section 6 of this Agreement. TCI will provide the In-Orbit
Testing results with respect to the Second Successfully Delivered Satellite to
Telesat within five days after Tempo's receipt of such results from Loral.
Telesat shall have the right to choose and exchange, or retain, as the case may
be, the five Transponders on the Satellites to be used by it during the Second
Interim Period, which Transponders may, but are not required to be, the same
Transponders previously designated as the "Telesat Transponders" on the First
Successfully Delivered Satellite; provided, that Telesat must keep as a Telesat
Transponder any Telesat Transponder that is not performing in accordance with
Performance Specifications at the time of Successful Delivery of the Second
Successfully Delivered Satellite. Telesat shall notify TCI in writing regarding
the five Transponders it desires to use within 10 days following its receipt of
the In-Orbit testing results for such Satellite.
-13-
<PAGE>
(c) TCI shall be entitled to the use of all Transponders on
the Satellites not chosen by Telesat pursuant to Section 2.4(b), such use to be
subject to the requirements of Section 8 of this Agreement.
SECTION 3. DESIGNATION OF TELESAT TRANSPONDERS.
3.1 Designation of Telesat Transponders.
-----------------------------------
(a) On the First Closing Date, the Transponders chosen by
Telesat pursuant to Section 2.2 of this Agreement (i.e., two Transponders if in
---
the 16 Transponder mode and 5 Transponders if in the 32 Transponder mode) shall
thereafter be known as the "Telesat Transponders." If the First Successfully
Delivered Satellite is being operated in the 16 Transponder mode on the First
Closing Date and TCI thereafter elects pursuant to Section 2.3 of this Agreement
to have Telesat operate such Satellite in the 32 Transponder mode, Telesat shall
acquire full ownership of three additional Transponders chosen by it on such
Satellite and the five Transponders retained by Telesat shall thereafter be
known as the "Telesat Transponders." Such acquisition of three additional
Transponders by Telesat shall, subject to the obligations of Telesat under
Section 4.3 and 7.6(c) to make refunds to TCI, be for no additional
consideration.
(b) From and after the date of Second Closing Date, both
Satellites shall be operated in the 16 Transponder mode as a high power DBS
system. From and after the Second Closing Date, the Transponders chosen by
Telesat pursuant to Section 2.4(b) shall thereafter be known as the "Telesat
Transponders."
(c) The maximum number of Transponders to be retained by
Telesat pursuant to this Agreement is five. The Parties agree to execute and
deliver to each other such instruments as may be necessary to vest title to the
Transponders in the proper Party following any redesignation by Telesat of its
Transponders pursuant to Section 2 or any additional acquisition by Telesat of
Transponders pursuant to Section 3.1. All Telesat Transponders are
non-preemptible.
SECTION 4. PURCHASE AND SALE OF SATELLITE TRANSPONDERS.
Subject to the terms and conditions set forth in this Agreement,
the Parties will effect the purchase and sale of Transponders described below:
4.1 Purchase and Sale of Transponders on First Successfully
-------------------------------------------------------
Delivered Satellite.
- -------------------
(a) If the First Successfully Delivered Satellite is sold
to Telesat pursuant to the Satellite Purchase Agreement and is being operated in
the 16 Transponder mode on the First Closing Date, Telesat, in consideration of
and in exchange for payment by TCI of the Transponder Purchase Price with
respect to the First Successfully Delivered Satellite pursuant to Section 4.3,
will sell, convey, transfer and assign to TCI, all of Telesat's right, title and
interest in
-14-
<PAGE>
and to the 14 Transponders on such Satellite not designated as the Telesat
Transponders pursuant to Section 3.1(a) of this Agreement or, if the First
Successfully Delivered Satellites has been accepted pursuant to Section 10.3 of
the BSS Construction Agreement, such lesser number of Transponders as remain
after designation by Telesat of its two Transponders (and such Transponders
shall then be the "TCI Transponders"). If the First Successfully Delivered
Satellite is being operated in the 32 Transponder mode at the time it is sold to
Telesat, the "TCI Transponders" sold to TCI under this Section 4.1(a) shall be
the 27 Transponders on the First Successfully Delivered Satellite not designated
as the Telesat Transponders pursuant to Section 3.1(a) of this Agreement or, if
the First Successfully Delivered Satellite has been accepted pursuant to Section
10.3 of the BSS Construction Agreement, such lesser number of Transponders as
remain after designation by Telesat of its five Transponders.
(b) From and after the Second Closing Date, both Satellites
shall be operated in the 16 Transponder mode as a high power DBS system. If the
Second Successfully Delivered Satellite is sold to Telesat pursuant to the
Satellite Purchase Agreement, on the Second Closing Date, Telesat, in
consideration of and in exchange for payment by TCI of the Transponder Purchase
Price with respect to the Second Successfully Delivered Satellite pursuant to
Section 4.3 , will sell, convey, transfer and assign to TCI all of Telesat's
right, title and interest in and to the 27 Transponders not designated as the
Telesat Transponders pursuant to Section 3.1(b), to the extent not previously
conveyed or, if the Second Successfully Delivered Satellite has been accepted
pursuant to Section 10.3 of the BSS Construction Agreement, such lesser number
of Transponders as remain after designation by Telesat of its five Transponders
(and such Transponders, together with the transponders previously acquired by
TCI pursuant to Section 4.1(a) of this Agreement shall thereafter be the "TCI
Transponders").
4.2 Title to, and Status of, TCI Transponders. Each transfer of
-----------------------------------------
a TCI Transponder to TCI under this Section 4 shall be made free and clear of
all Encumbrances created by or applicable to Telesat except Permitted
Encumbrances, such assignment to be effected pursuant to an Assignment Agreement
in the form attached to this Agreement as EXHIBIT A (the "Assignment
Agreement"), as modified to reflect the Transponders actually being sold to TCI.
The TCI Transponders are non-preemptible.
4.3 Payment of Transponder Purchase Price. On the First Closing
-------------------------------------
Date and, if applicable, the Second Closing Date, TCI will pay to Telesat the
Transponder Purchase Price with respect to the Satellite sold to Telesat on such
Closing Date, which amount will be offset by Telesat against the Satellite
Purchase Price payable by Telesat to Tempo pursuant to the Satellite Purchase
Agreement with respect to such Satellite and Telesat agrees that TCI may offset
the Transponder Purchase Price payable on such Closing Date against an equal
amount of the Satellite Purchase Price payable by Telesat to Tempo on such date.
If TCI exercises the option granted to it in Section 2.3 of this Agreement, the
Transponder Purchase Price for the First Successfully Delivered Satellite will
be recalculated on the date of exercise by TCI of such option pursuant to the
formula set forth in Section 1.48(a) and the positive difference between the
-15-
<PAGE>
Transponder Purchase Price as recalculated and the Transponder Purchase Price
previously paid by TCI in respect of the First Successfully Delivered Satellite
will be refunded to TCI by Telesat, such refund to be effected by TCI offsetting
the amount due to it from Telesat against the next payment of Operating Fees
made by TCI in respect of the First Successfully Delivered Satellite.
SECTION 5. TERM.
Subject to the provisions of Sections 7.8, 13.9(d) and 16, the
term of this Agreement shall commence on the date hereof and shall terminate
when there are no longer any Satellites which have not been deemed to be a
Satellite Failure (the "Term").
SECTION 6. TELESAT TRANSPONDERS.
6.1 Sale of Telesat Transponders to Canadian DBS Providers.
------------------------------------------------------
(a) TCI, through an Affiliate, operates a direct-to-home
distribution service and acknowledges the desirability of joint marketing and
programming relationships with potential Canadian DBS providers and, therefore,
agrees to work in full cooperation with Telesat to formulate arrangements that
will enhance the ability of Telesat to sell, lease or otherwise provide the use
of Telesat's Transponders to Canadian DBS Providers. Following execution of this
Agreement, Telesat shall use its best efforts to finalize an operating agreement
or a purchase agreement with one or more Canadian DBS Providers for use or sale
of the Telesat Transponders; provided, however, that if Telesat is unable with
respect to any Telesat Transponder (an "Unused Telesat Transponder") to reach an
agreement with a Canadian DBS Provider within one year following the date on
which Telesat acquired ownership of such Unused Telesat Transponder, Telesat
may, not later than 15 months following the date on which Telesat acquired
ownership of such Unused Telesat Transponders, offer to sell all such Unused
Telesat Transponders to TCI and TCI shall, within 90 days following its receipt
of such offer, purchase such Unused Telesat Transponders on the terms and
conditions set forth in Section 6.1(b) below; provided, that TCI shall not be
obligated to purchase any Unused Telesat Transponder that has suffered a
Transponder Failure.
(b) The terms and conditions pursuant to which TCI shall
purchase the Unused Telesat Transponders put to it by Telesat are as follows:
(i) TCI shall make a one time only payment of capital
for each Unused Telesat Transponder to be purchased by it equal to [*****]
-16-
<PAGE>
and Telesat will, by appropriate documentation, Transfer to TCI, free and clear
of all Encumbrances other than Permitted Encumbrances and Encumbrances created
prior to the time Telesat acquired title to or began using the Unused Telesat
Transponders, all of Telesat's right, title and interest in and to, the Unused
Telesat Transponders.
(ii) In addition, TCI shall [*****] with respect to
the TCI Transponders on the Satellite which contains the Unused Telesat
Transponders.
6.2 Newly Available Telesat Transponders. If a Telesat
------------------------------------
Transponder which was initially Transferred by Telesat to a Canadian DBS
Provider pursuant to Section 6.1(a) of this Agreement subsequently becomes
available (a "Newly Available Telesat Transponder"), Telesat may Transfer such
Newly Available Telesat Transponder to a Canadian DBS Provider without first
offering such Transponder to TCI. If Telesat has not Transferred a Newly
Available Telesat Transponder to a Canadian DBS Provider within three months
following the date on which such Transponder again became available, Telesat may
offer such transponder to TCI and TCI shall have the option (the "TCI Option")
to accept such offer from Telesat for [*****] The closing of any Transfer
pursuant to this Section will be held on a date agreed to by Telesat and TCI
which is not later than 60 days after the date of TCI's exercise of the TCI
Option. At closing of any
-17-
<PAGE>
Transfer contemplated by this Section 6.2, TCI will pay the required purchase
price and Telesat will, by appropriate documentation, Transfer to TCI, free and
clear of all Encumbrances other than Permitted Encumbrances and Encumbrances
created prior to the time Telesat acquired title to or began using the Unused
Telesat Transponders, all of Telesat's right, title and interest in and to, the
applicable Newly Available Telesat Transponder.
6.3 Sale of Telesat Transponders to Third Parties Pursuant to
---------------------------------------------------------
Right of First Refusal. Telesat may Transfer all, but not less than all, of any
- ----------------------
Newly Available Telesat Transponder to a Third Party that is not a Canadian DBS
Provider only pursuant to a Third Party Offer and only after following the
procedures set forth in this Section 6.3. The Third Party Offer must be for the
remaining life of the Newly Available Telesat Transponder [*****] TCI may accept
such offer in whole but not in part, by giving written notice to Telesat within
15 days after its receipt of written notice from Telesat of such offer. The
closing of any Transfer pursuant to this Section will be held on a date agreed
to by Telesat and TCI which is not later than 60 days after the date of TCI's
notice of acceptance. At closing of any Transfer contemplated by this Section
6.3, TCI will pay the required purchase price and Telesat will, by appropriate
documentation, Transfer to TCI, free and clear of all Encumbrances other than
Permitted Encumbrances and Encumbrances created prior to the time Telesat
acquired title to or began using the Unused Telesat Transponders, all of
Telesat's right, title and interest in and to, the applicable Newly Available
Telesat Transponder. If TCI does not accept an offer by Telesat to Transfer a
Newly Available Telesat Transponder or does not close the Transfer in accordance
with this Section, [*****]
6.4 Treatment of Transferred Telesat Transponders. Upon
---------------------------------------------
consummation of a Transfer of any portion of the Telesat Transponders to TCI
pursuant to Section 6.1, 6.2 or 6.3, the Telesat Transponders Transferred to TCI
shall thereafter be included in the definition of TCI Transponders for all
purposes.
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<PAGE>
SECTION 7. OPERATION OF SATELLITE.
7.1 Operation of the Satellite. Telesat shall be responsible
--------------------------
for operating and maintaining the Satellites at the 82 degree West orbital
location during the Term of this Agreement (including maintenance and operation
of each Satellite pending Closing for such Satellite, as contemplated by Section
2 of this Agreement) in accordance with the Satellite Orbital Operation Handbook
(as defined in the BSS Construction Agreement). Telesat and TCI will jointly
coordinate operating levels and the type of modulation in the bandwidth.
7.2 Compliance with Law. Telesat will comply with all
-------------------
applicable Legal Requirements, both current and as may come into effect, in
connection with the performance of its obligations under this Agreement.
7.3 Operating Costs. Telesat shall be responsible for all costs
---------------
of operating and maintaining the Satellites at the 82 degree West orbital
location during the Term of this Agreement, including, without limitation, the
following:
(a) [*****];
(b) [*****]
(c) [*****]
(d) [*****]
7.4 Satellite Operations. Throughout the term of this
--------------------
Agreement, Telesat, at its cost and expense, shall provide for all the functions
of Tracking, Telemetry and Command ("TT&C") in accordance with the plan attached
as EXHIBIT F, including, without limitation, stationkeeping, attitude control,
and other satellite maintenance and switching functions as shall be necessary to
maintain the Transponders on the Satellites in accordance with the Performance
Specifications. When a new TT&C facility is established, Telesat shall promptly
notify TCI. The Two-Channel Transponder Simulator (identified as Item 3 in
Section 4.1 of the BSS Construction Agreement) shall be located at the TCI
National Digital Television Center facility in Denver, CO, and shall be made
available to Telesat and its Canadian customers using the Satellite(s), free of
charge, for simulated transmission testing. TCI will be the owner of and will
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<PAGE>
be responsible for the cost of operating, maintaining and, at its option,
replacing the Two-Channel Transponder Simulator.
7.5 Telesat Reports. Telesat will provide TCI with the
---------------
following reports regarding the operation of the Satellites and the associated
TT&C facilities:
(a) Following the Closing Dates, Telesat shall provide TCI
with monthly written operational reports concerning the Satellite(s) and shall
provide general advice without any liability on its part to TCI on any technical
matters relating to the operation of the TCI Transponders. Anomalous operations
shall be reported to TCI as soon as possible. Each party agrees to promptly
notify the other, in writing if it receives notification of any governmental
action or order which will materially affect the operation of the Satellite(s)
or the terms of this Agreement.
(b) Telesat shall notify and consult with TCI regarding all
maneuvers of the Satellite(s) which would result in a change in the orbital
location of the Satellite(s) within twenty-four (24) hours of Telesat becoming
aware of the need for the change. Telesat, in its sole discretion, has the right
to select the most convenient hours during which such maneuvers shall occur,
consistent with Telesat's obligation to properly maintain the affected
Satellite.
7.6 Payment of Operating Fees. In consideration of the services
-------------------------
provided by Telesat under this Agreement, TCI shall pay to Telesat the quarterly
payments provided for in this Section 7.6 and in Section 6.
(a) The quarterly payments to be made by TCI pursuant to
Section 7.6(b), (d) or (e) and Section 6, as applicable, and as adjusted
pursuant to the provisions of Sections 7.6 and 7.7, are referred to herein as
the "Operating Fees." Telesat will designate the account to which the Operating
Fees shall be paid prior to the First Closing. Telesat will render invoices to
TCI with respect to each payment of Operating Fees due hereunder at least 30
days prior to the date on which such payment is due.
(b) On the first day of each of the 48 full calender
quarters immediately following the First Closing Date, TCI will pay Operating
Fees to Telesat in the amount of [*****] in respect of the First Successfully
Delivered Satellite, as adjusted pursuant to the provisions of Sections 7.6 and
7.7. The Operating Fees set forth in this Section 7.6(b) are based on an assumed
Purchase Price of First Successfully Delivered Satellite of [*****] and an
assumed Telesat Share for the First Successfully Delivered Satellite of [*****].
For each dollar reduction or increase in the amount of the Telesat Share with
respect to the First Successfully Delivered Satellite below or above [*****],
there shall be a reduction or increase, as applicable, in the quarterly
Operating Fees payable under this Section 7.6(b) in an amount equal to the
amount of the reduction or increase in the Telesat Share multiplied by .0304.
For example, if the Purchase Price of First Successfully Delivered Satellite
were actually [*****] and the Telesat Share were [*****], the amount of the
quarterly Operating Fees payable pursuant to this Section 7.6(b) would be
[*****] (i.e., [*****] multiplied by .0304 equals a [*****] reduction in the
----
amount of the Operating Fees). The Operating Fees set forth in Section 7.6(b)
and (e) include an allocation to TCI of 27/32nds of an assumed [*****] annual
license fee payable to Industry Canada for use of the 82 degrees West orbital
location for two Satellites.
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<PAGE>
(c) If the First Successfully Delivered Satellite is being
operated in the 16 Transponder mode when it is sold to Telesat, the Operating
Fees payable in respect of such Satellite (as initially calculated pursuant to
Section 7.6(b) and as thereafter adjusted from time to time pursuant to Section
7.6 and 7.7) made prior to exercise by TCI of the option granted to it in
Section 2.3 of this Agreement will be increased by an amount equal to the
product obtained by multiplying .037 by the Operating Fees for such Satellite
then in effect. If TCI exercises the option granted to it in Section 2.3 of this
Agreement, all additional payments previously made by TCI pursuant to this
Section 7.6(c) will be refunded to TCI by Telesat, such refund to be effected by
TCI offsetting the amount due to it from Telesat against the next payment of
Operating Fees made by TCI in respect of the First Successfully Delivered
Satellite.
(d) In addition to the Operating Fees provided for in
Sections 7.6(b) and (c), on the first day of each of the 48 full calendar
quarters immediately following the First Closing Date and pending the Second
Closing Date, (i) TCI will pay to Telesat a service fee of [*****], and (ii) if
the license fees payable to Industry Canada by Telesat are a fixed amount for
the 82 degrees West orbital slot and do not vary based on the number of
satellites located at such orbital slot or the number of frequencies used at
such orbital slot, TCI will pay to Telesat an additional service fee of [*****],
it being agreed that TCI's obligation to pay Telesat such additional [*****] and
[*****] service fees will terminate on the Second Closing Date.
(e) On the first day of each of the 48 full calendar
quarters immediately following the Second Closing Date, TCI will pay Operating
Fees to Telesat in the amount of [*****] in respect of the Second Successfully
Delivered Satellite, as adjusted pursuant to the provisions of Sections 7.6 and
7.7. The Operating Fees set forth in this Section 7.6(e) are based on an assumed
Purchase Price of Second Successfully Delivered Satellite of [*****] and an
assumed Telesat Share for the Second Successfully Delivered Satellite of
[*****]. For each dollar reduction or increase in the amount of the Telesat
Share with respect to the Second Successfully Delivered Satellite below or
above [*****], there shall be a reduction or increase, as applicable, in the
Operating Fees payable under this Section 7.6(e) in an amount equal to the
amount of the reduction or increase in the Telesat Share multiplied by .0304.
(f) If the First Successfully Delivered Satellite is being
operated in the 16 Transponder mode at the time the Second Successfully
Delivered Satellite is sold to Telesat, the Operating Fees for the Second
Successfully Delivered Satellite (as initially calculated pursuant to Section
7.6(e) and as thereafter adjusted from time to time pursuant to Section 7.7)
shall be reduced by an amount equal to the product obtained by multiplying .037
by the Operating Fees for such Satellite then in effect.
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<PAGE>
(g) If Telesat does not obtain and maintain in full force
and effect on an annual basis during the Term, insurance on a Satellite in an
amount at least equal to the Average Present Value Amount (as defined below),
(such amount of insurance coverage being referred to herein as the "Annual
Insurance Coverage"), Telesat shall credit TCI each quarter of such insurance
year with an amount in respect of such Satellite equal to:
(Average Present Value Amount - Annual Insurance Coverage) x 0.025
------------------------------------------------------------------
4
The "Average Present Value Amount" means an amount in any insurance year equal
to the average of 75% of the present value of the remaining quarterly Operating
Fees relating to the Satellite being insured calculated at an annual discount
rate of 10% as of the beginning and end of such insurance year. Notwithstanding
the aforesaid, there shall be no amount credited by Telesat to TCI under this
Section for any insurance year in the event (i) the cost of the Annual Insurance
Coverage for such year is equal to or greater than the product of the Average
Present Value Amount for such year and 2 1/2%; or (ii) pursuant to Section
13.10, TCI desires to purchase in-orbit insurance in connection with its
ownership of the TCI Transponders and the effect of such purchase is that
Telesat is unable to purchase in such year an amount of insurance equal to the
Average Present Value Amount.
7.7 Prepaid Operating Fees: Warranty Paybacks: Payments in Respect
----------------------
of Resurrected Transponders.
(a) At any time and from time to time after the date which
is one year after the First Closing Date, TCI may prepay Operating Fees to
Telesat (the "Prepaid Operating Fees" ) with respect to the TCI Transponders,
and shall designate at the time each such payment is made whether such Prepaid
Operating Fees relate to the TCI Transponders purchased by it on the First
Closing Date or the Second Closing Date. Following each payment of Prepaid
Operating Fees, the Operating Fees payable with respect to the TCI Transponders
to which such payment relates shall be reduced by an amount equal to the number
obtained by multiplying the amount of the Prepaid Operating Fees by the number
set forth on EXHIBIT D hereto with respect to the quarter during which such
Prepaid Operating Fees are paid.
(b) As specified in the Loral Side Agreement, Warranty
Payback payments by Loral pursuant to Articles 13 and 14 of the BSS Construction
Agreement ("Warranty Paybacks") in respect of TCI Transponders shall, to the
extent not taken into account as a reduction in the Satellite Purchase Price,
be shared equally by Telecast and Tempo, the amount of any Warranty Payback
payment to Telesat being referred to herein as a "Telesat Warranty Payback."
Following each payment to Telesat of a Telesat Warranty Payback, the Operating
Fees with respect to the TCI Transponders to which such payment relates shall be
reduced by an amount equal to the number obtained by multiplying the Telesat
Warranty Payback by the number set forth on Exhibit D hereto with respect to the
quarter during which such Telesat Warrant Payback is paid to Telesat.
-22-
<PAGE>
(c) Telesat agrees that it will timely pay to Loral on
behalf of Tempo any Resurrected Transponder (as defined in the BSS Construction
Agreement) payment that Tempo is required to make under the BSS Construction
Agreement to the extent that Telesat received the Warranty Payback to which such
Resurrected Transponder payment relates in an amount not to exceed the amount of
such Warranty Payback. Following each such payment by Telesat that relates to a
TCI Transponder, the Operating Fees with respect to the TCI Transponders to
which such payment relates shall be increased by an amount equal to the number
obtained by multiplying the amount of such payment by Telesat by the number set
forth on EXHIBIT D hereto with respect to the quarter during which such payment
is made by Telesat.
7.8 Effect of Satellite or Transponder Failure.
------------------------------------------
(a) Unless this Agreement is terminated under Section 16,
the Operating Fees for Successfully Delivered Satellites, as appropriately
adjusted pursuant to Sections 7.6 and 7.7 of this Agreement, and the obligations
of the guarantor under the Guarantee described in Section 7.9, shall, subject to
the limitations set forth in Section 7.8(b) and (c), continue and be payable in
each and every event, including, without limitation, Force Majeure and whether
any Satellite or Transponder is operating and is able to transmit and receive
signals on any or all of the channels for which it was intended to operate.
(b) If a Satellite failure occurs for which Telesat is
entitled to make a claim under any Telesat Insurance policy and the Satellite
continues to operate, Telesat agrees that it will diligently pursue payment of
such claim and further agrees that the amount of any insurance proceeds received
by Telesat net of any salvage value payable to Telesat's insurers (such net
amount being referred to herein as "net insurance proceeds") in respect to the
Satellite failure will reduce the Operating Fees in respect of such Satellite
thereafter payable by TCI by an amount equal to the number obtained by
multiplying 27/32 of the amount of the net insurance proceeds so received by
Telesat by the number set forth on EXHIBIT D hereto with respect to the quarter
during which such net insurance proceeds were received by Telesat. [*****]
(c) If a Satellite failure occurs for which Telesat is
entitled to make a claim under any Telesat Insurance policy and the Satellite is
decommissioned, Telesat agrees that it will diligently pursue payment of such
claim and further agrees that TCI's obligation to continue payment of the
prescribed Operating Fees in respect of such Satellite for the period from and
after the date of receipt of the net insurance proceeds by Telesat will
terminate provided [*****]
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<PAGE>
payment and 27/32 of the net insurance proceeds. An annual discount rate of 10%
will be applied in present value calculation.
(d) Upon termination of this Agreement as to a single
Satellite pursuant to Section 7.8(c), TCI will begin or resume making the
payments provided for in Section 7.6(d)(i) and, if applicable, Section
7.6(d)(ii) with respect to the period from and after the date of complete
Satellite failure.
7.9 Guarantee.
---------
(a) At each Closing, TCI shall cause Tele-Communications,
Inc., a Delaware corporation ("Tele-Communications") or, with the prior written
approval of Telesat (not to be unreasonably withheld), a substitute guarantor.
to deliver to Telesat a guarantee in the form of EXHIBIT B (a "Guarantee").
Telesat acknowledges that the designation of Tele-Communications as the entity
to deliver the Guarantee at each Closing is intended as a temporary measure and
that Telesat may not refuse to consent to a substitute guarantor solely on the
basis that the proposed substitute guarantor does not have an equivalent net
worth, fair market value or financial capacity to Tele-Communications. Within 10
days after Telesat's receipt from TCI of a written request to designate a
substitute guarantor, Telesat will request such financial and legal information
as Telesat shall reasonably require from Tele-Communications. Telesat shall
confirm in writing the giving or denial of the consent to the proposed
assignment within 30 days after the receipt by Telesat of such information. If
Telesat shall not have given or denied its consent to a substitute guarantor
within such 30 day period, Telesat shall be deemed to have consented to such
substitute guarantor. If Telesat shall deny such consent within such period, it
shall specify with reasonable particularity the reasons for such denial.
(b) In lieu of causing Tele-Communications or a substitute
guarantor to deliver a Guarantee to Telesat at a Closing, TCI may deliver to
Telesat a letter of credit issued by a financial institution with at least an A-
credit rating and not rated a lower grade by Standard & Poor's Corporation or
Moody's Investor Service, Inc. (or any successor thereto), which letter of
credit (i) will secure TCI's obligation to pay Operating Fees for the
Transponders sold to TCI on such Closing Date up to a maximum amount (the
"Maximum Secured Amount") initially equal to (x) the Satellite Purchase Price
paid on such Closing Date minus the Transponder Purchase Price paid on such
Closing Date [*****]; provided that the Maximum Secured Amount shall decrease on
the first day of each of the 48 full calendar quarters following such Closing
Date by an amount equal to 1/48 of the Initial Secured Amount if TCI pays the
Operating Fees for each such calendar quarter when due and if such Operating
Fees are not paid when due but are paid within 45 days after TCI's receipt of
written notice from Telesat of late payment thereof, then the Maximum Secured
Amount shall decrease on the Business Day immediately following receipt of such
outstanding Operating Fees by Telesat by an amount equal to 1/48 of the Initial
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<PAGE>
Secured Amount, (ii) will have a term commencing on the date of delivery to
Telesat and ending on the date which is six months following the end of the 48th
calendar quarter following the Closing Date to which such letter of credit
relates or have such renewal provisions as may be acceptable to Telesat in its
sole discretion, and (iii) otherwise be on terms customary for commercial
letters of credit.
7.10 Payments after Completion of Operating Fees. Subject to the
-------------------------------------------
obligations of TCI under Section 13.9 with respect to successor satellites, if
TCI continues to use TCI Transponders after all Operating Fees required to be
made under Sections 6, 7.6 and 7.7 with respect to such TCI Transponders have
been made, TCI will continue during the time it uses such Transponders [*****].
SECTION 8. USE OF TCI TRANSPONDERS.
8.1 Use of TCI Transponders. Subject to the terms of Sections
-----------------------
8.6, 8.7 and 8.8, TCI shall have the right to use the TCI Transponders and to
permit the use by third Persons of the TCI Transponders for any lawful and
civilian purpose. Notwithstanding the foregoing, TCI agrees that, subject to any
legal limitations and for the life of the current ANIK E fleet of Telesat, which
satellites are estimated to reach the end of their useful lives in 2003, TCI
will not sell or lease any of the TCI Transponders to any Person which is a
customer of Telesat on its ANIK E fleet on the date of this Agreement unless
such Person desires to use the TCI Transponders to duplicate the programming it
distributes on Telesat's ANIK E fleet or to distribute programming not then
distributed by it on Telesat's ANIK E fleet.
8.2 Encryption. TCI shall have the right to use any encryption,
----------
digital compression technology or transmission format of its own choosing in its
signal transmission. Telesat shall not assess an additional charge with respect
to such use or any change of use.
8.3 Radio Transmissions. TCI's radio transmissions to the
-------------------
Satellite(s) shall comply with all applicable Legal Requirements, and shall not
interfere with the use of any Transponder or operation of the Satellite(s).
8.4 Frequency Plans. TCI specifically agrees to submit its
---------------
frequency and transmission plans and any proposed changes thereto to Telesat for
approval (which shall not be unreasonably withheld) prior to transmission or
after any change thereof and to take all necessary precautions to ensure that
its use of the TCI Transponders is in conformity with such approved frequency
and transmission plans and is in all other respects consistent with the
Satellite Orbital Operation Handbook and the Telesat Access Requirements.
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<PAGE>
8.5 Uplinking. Subject to any applicable regulatory approvals,
---------
TCI shall have the right to uplink, or arrange for uplinking to the Satellite(s)
from any uplink facilities in any location. When signals are being transmitted
to the TCI Transponders, TCI shall be responsible for proper illumination of the
TCI Transponders in accordance with the Telesat Access Requirements so as not to
interfere with the use of or cause harm to the Telesat Transponders or to the
Satellite(s).
8.6 Content of Communications. TCI will not use the TCI
-------------------------
Transponders to transmit communications into the United States depicting or
describing "sexually explicit conduct" as defined in 18 United States Code (S)
2256(2), unless the depiction or description of such conduct in a communication
is integrally related to and advances the thematic content of the communication
and such content has serious literary, artistic, political or scientific value.
TCI will not use the TCI Transponders to transmit communications into Canada
which are "obscene" as defined by the Criminal Code, R.S.e. C-84 S.168, as
amended.
8.7 Compliance with Law. In connection with its use of the TCI
-------------------
Transponders and the performance of its other obligations hereunder, TCI shall
comply with all applicable Legal Requirements, both current and as may come into
effect.
8.8 Compliance with Telesat Access Requirements. TCI will
-------------------------------------------
comply, and shall cause any other Person which uses the TCI Transponders to
comply, with the Telesat Access Requirements in its use of the TCI Transponders.
SECTION 9. TRANSPONDER RESTORATION PROCEDURES.
9.1 Designated TWTs. Each Transponder on a Satellite will
---------------
initially include one designated TWT if the Satellite is being operated in the
32 Transponder mode and two designated TWTs if the Satellite is being operated
in the 16 Transponder mode.
9.2 Notice of Transponder Failure. Each Party shall promptly
-----------------------------
notify the other Party upon learning of the commencement of any Transponder
Failure and of the relevant facts known to it concerning such failure. A
Transponder Failure with respect to a Telesat Transponder shall be deemed to
have commenced upon receipt by TCI from Telesat of written notice regarding such
Transponder Failure. Upon Telesat's verification (based on reasonable grounds)
that a TCI Transponder has suffered a Transponder Failure, which verification or
denial thereof shall be promptly made but in no event later than seven days
after TCI's notification of the commencement of a Transponder Failure, such
failure shall be deemed to have commenced upon receipt by Telesat of
notification from TCI, or Telesat's actual knowledge of such event, whichever
first occurs.
9.3 Use of Spare TWTAs. In the event of a Transponder Failure
------------------
with respect to a Telesat Transponder or a TCI Transponder, Telesat, as soon as
possible and to the extent technically feasible, will employ a Spare TWTA in the
applicable Satellite as a substitute for the
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<PAGE>
equipment unit which caused such Transponder to suffer a Transponder Failure. To
the extent technically feasible, a Spare TWTA will be substituted for the faulty
equipment unit on a first-needed, first-served basis as among TCI and users of
Telesat Transponders on the same Satellite which have suffered a Transponder
Failure; provided, however, that Telesat's obligations to provide Spare TWTAs
shall continue until such time as all of the Spare TWTAs on a Satellite are
committed to use as substitutes for Transponders on such Satellite which have
suffered Transponder Failures.
9.4 Continued Use of Failed Transponder. TCI may elect to
-----------------------------------
continue to use a Transponder that is a Transponder Failure. In addition, if a
TCI Transponder does not perform in accordance with Performance Specifications
following the substitution of a Spare TWTA pursuant to Section 9.3, TCI may
elect to use a different Spare TWTA if one is available or to return to use of
the equipment unit for which the SPARE TWTA was substituted.
SECTION 10. REPRESENTATIONS AND WARRANTIES OF TELESAT.
To induce TCI to enter into this Agreement, Telesat represents and
warrants to TCI, as of the date of this Agreement and as of each Closing Date,
except with respect to representations and warranties made as of a specific
date, as follows:
101 Organization and Qualification. Telesat is a corporation
------------------------------
validly existing and in good standing under the laws of Canada and has all
requisite corporate power and authority to carry on its business as currently
conducted and to own, lease, use and operate its assets except where the failure
to have such power and authority would not have a material adverse effect on
Telesat. Telesat has delivered to TCI complete and correct copies of the
Articles of Continuance and Bylaws of Telesat, which Articles of Continuance and
Bylaws have not been amended, modified or rescinded and are in full force and
effect.
10.2 Authority and Validity. Subject to obtaining the approval of
----------------------
the board of directors of Telesat, Telesat has all requisite corporate power and
authority to execute and deliver, to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement. Subject to
obtaining the approval of Telesat's board of directors, the execution and
delivery by Telesat of, the performance by Telesat of its obligations under, and
the consummation by Telesat of the transactions contemplated by, this Agreement
have been duly authorized by all requisite corporate action of Telesat. Telesat
will deliver to TCI on or before May 27, 1996, complete and correct copies of
resolutions, certified by Telesat's secretary, authorizing such execution,
delivery, performance and consummation, which have been duly adopted by
Telesat's board of directors and which have not been amended, modified or
rescinded and are in full force and effect. Subject to obtaining the approval of
Telesat's board of directors, this Agreement has been duly executed and
delivered by Telesat and is the valid and binding obligation of Telesat,
enforceable against Telesat in accordance with its terms, except insofar as
enforceability may be affected by applicable bankruptcy, insolvency,
reorganization, moratorium
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<PAGE>
or similar laws now or hereafter in effect affecting creditors' rights generally
or by principles governing the availability of equitable remedies.
10.3 No Breach or Violation. Subject to obtaining the Telesat
----------------------
Required Consents, including those listed on SCHEDULE 1 to the Satellite
Purchase Agreement, the execution, delivery and performance of this Agreement by
Telesat will not: (a) violate any provision of the Articles of Continuance or
Bylaws of Telesat; (b) violate any Legal Requirement; (c) require any consent,
approval or authorization of, or any filing with or notice to, any Person; or
(d) (i) violate, conflict with or constitute a breach of or default under
(without regard to requirements of notice, passage of time or elections of any
Person), (ii) permit or result in the termination, suspension or modification
of, (iii) result in the acceleration of (or give any Person the right to
accelerate) the performance of Telesat under, or (iv) result in the creation or
imposition of any Encumbrance under, any instrument or other agreement to which
Telesat is a party or by which Telesat or any of its assets is bound or
affected, except for purposes of clauses (b) or (d) such violations, conflicts,
breaches, defaults, terminations, suspensions, modifications and accelerations
as would not, individually or in the aggregate, have a material adverse effect
on the ability of Telesat to perform its obligations under this Agreement.
SCHEDULE 1 to the Satellite Purchase Agreement lists all Telesat Required
Consents of which Telesat is aware as of the date of this Agreement.
SECTION 11. REPRESENTATIONS AND WARRANTIES OF TCI.
To induce Telesat to enter into this Agreement, TCI represents and
warrants to Telesat, as of the date of this Agreement and as of each Closing
Date, except with respect to representations and warranties made as of a
specific date, as follows:
11.1 Organization. TCI is a corporation duly organized, validly
------------
existing and in good standing under the laws of its state of incorporation and
has all requisite corporate power and authority to carry on its business as
currently conducted and to own, lease, use and operate its assets, except where
the failure to have such power and authority would not have a material adverse
effect on TCI. TCI has delivered to Telesat complete and correct copies of the
Articles or Certificate of Incorporation and Bylaws of TCI, which Articles or
Certificate of Incorporation and Bylaws have not been amended, modified or
rescinded and are in full force and effect.
11.2 Authority and Validity. Subject to obtaining the approval of
----------------------
the board of directors of TCI, TCI has all requisite corporate power and
authority to execute and deliver, to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement. The execution and
delivery by TCI of, the performance by TCI of its obligations under, and the
consummation by TCI of the transactions contemplated by, this Agreement have
been duly authorized by all requisite corporate action of TCI. TCI will deliver
to Telesat on or before May 27, 1996, complete and correct copies of
resolutions, certified by TCI's secretary, authorizing such execution, delivery,
performance and consummation, which have been duly adopted by TCI's board of
directors and which have not been amended, modified or rescinded
-28-
<PAGE>
and are in full force and effect. Subject to obtaining the approval of the board
of directors of TCI, this Agreement has been duly executed and delivered by TCI
and is the valid and binding obligation of TCI, enforceable against TCI in
accordance with its terms, except insofar as enforceability may be affected by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
now or hereafter in effect affecting creditors' rights generally or by
principles governing the availability of equitable remedies.
11.3 No Breach or Violation. Subject to obtaining the Tempo
----------------------
Required Consents, including those listed on SCHEDULE 2 to the Satellite
Purchase Agreement, the execution, delivery and performance of this Agreement by
TCI will not: (a) violate any provision of the charter or bylaws of TCI; (b)
violate any Legal Requirement; (c) require any consent, approval or
authorization of, or any filing with or notice to, any Person; or (d) (i)
violate, conflict with or constitute a breach of or default under (without
regard to requirements of notice, passage of time or elections of any Person),
(ii) permit or result in the termination, suspension or modification of, (iii)
result in the acceleration of (or give any Person the right to accelerate) the
erformance of TCI under, or (iv) result in the creation or imposition of any
Encumbrance under, any instrument or other agreement to which TCI is a party or
by which TCI or any of its assets is bound or affected, except for purposes of
clauses (b) or (d) such violations, conflicts, breaches, defaults, terminations,
suspensions, modifications and accelerations as would not, individually or in
the aggregate, have a material adverse effect on TCI, or on the ability of TCI
to perform its obligations under this Agreement. SCHEDULE 2 to the Satellite
Purchase Agreement lists all Tempo Required Consents of which TCI is aware as of
the date of this Agreement.
SECTION 12. WARRANTIES AND LIMITATION OF LIABILITY.
12.1 Disclaimer of Warranties and Limitation of Liability. ANY
----------------------------------------------------
AND ALL EXPRESS AND IMPLIED WARRANTIES WITH RESPECT TO THE SATELLITES, THE
TRANSPONDERS THEREON AND THE DELIVERABLE ITEMS, INCLUDING, BUT NOT LIMITED TO,
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PURPOSE OR USE, ARE EXPRESSLY
EXCLUDED AND DISCLAIMED. IT EXPRESSLY IS AGREED THAT TELESAT'S SOLE OBLIGATIONS
AND LIABILITIES AND TCI'S EXCLUSIVE REMEDIES FOR ANY FAILURE OF A SATELLITE OR
ANY TRANSPONDER THEREON TO PERFORM IN ACCORDANCE WITH THE PERFORMANCE
SPECIFICATIONS OR ANY FAILURE OF A DELIVERABLE ITEM TO PERFORM (INCLUDING,
WITHOUT LIMITATION, LIABILITY ARISING FROM NEGLIGENCE) ARE LIMITED TO THOSE SET
FORTH IN SECTIONS 12.2 AND 12.3 AND ALL OTHER REMEDIES OF ANY KIND ARE EXPRESSLY
EXCLUDED.
12.2 Injunctive Relief. TCI and Telesat each shall have the right
-----------------
to obtain injunctive relief, if necessary, in order to prevent the other party
from willfully breaching its obligations under this Agreement or to compel the
other party to perform its obligations under this Agreement. Any proceedings for
injunctive relief shall be governed by and construed in all
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respects in accordance with Ontario law without regard to the conflicts of laws
rules of the Province of Ontario and shall be resolved by the courts of the
Province of Ontario, to whose exclusive jurisdiction the Parties agree to submit
regardless of their domicile.
12.3 Negligent Operation of the Satellite. If, (i) solely because
------------------------------------
of negligence on the part of Telesat or Telesat's representatives, consultants
or subcontractors in the operation of, testing of, or communication with, a
Satellite, such Satellite operates in a manner that is not in accordance with
the Performance Specifications; (ii) [*****] Telesat, or Telesat's
representatives, consultants or subcontractors for the remaining period of the
Orbital Performance Incentive Period (as defined in the BSS Construction
Agreement), then subject to any reduction in the Orbital Performance Incentive
resulting from subsequent operation of the Satellite below the Performance
Specification for reasons other than the negligence of Telesat or Telesat's
representatives, consultants or subcontractors, Telesat shall be liable to TCI
[*****].
12.4 Force Majeure. Except for the obligations of TCI under
-------------
Section 7.8, neither Telesat nor TCI shall be liable to the other for any
failure of performance hereunder due to Force Majeure. In the event that Force
Majeure is claimed by either Party, that Party shall provide prompt notice to
the other Party of both the commencement and cessation dates of such Force
Majeure event.
12.5 Limitation of Liability. SUBJECT TO SECTION 12.3, NEITHER
-----------------------
PARTY SHALL BE LIABLE DIRECTLY OR INDIRECTLY TO THE OTHER OR TO ANY PERMITTED
ASSIGNEES OR SUCCESSOR OWNERS OF THE SATELLITE(S) OR TRANSPONDERS ON THE
SATELLITES OR ANY DELIVERABLE ITEMS FOR ANY AMOUNTS (INCLUDING ANY SUCH AMOUNTS
CLAIMED BY THIRD PARTIES) REPRESENTING LOSS OF PROFITS, LOSS OF BUSINESS, OR
INDIRECT, SPECIAL, EXEMPLARY, CONSEQUENTIAL OR PUNITIVE DAMAGES ARISING FROM THE
PERFORMANCE OR NONPERFORMANCE OF THIS CONTRACT OR ANY ACTS OR OMISSIONS
ASSOCIATED THEREWITH OR RELATED TO THE USE OF ANY ITEMS OR SERVICES FURNISHED
HEREUNDER, WHETHER THE BASIS OF THE LIABILITY IS BREACH OF CONTRACT, TORT
(INCLUDING NEGLIGENCE AND STRICT LIABILITY), STATUTES OR ANY OTHER LEGAL THEORY,
UNLESS SUCH ACT OR OMISSION ARISES FROM THE NON-CLAIMING PARTY'S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT. TELESAT AGREES TO AN EQUIVALENT LIMITATION OF
LIABILITY WITH RESPECT TO LORAL. EACH OF TCI AND TELESAT SHALL USE ITS BEST
EFFORTS, WHEN NEGOTIATING AGREEMENTS WITH SATELLITE OR TRANSPONDER USERS AND
OTHER PARTIES HAVING A FINANCIAL INTEREST IN THE OPERATION AND USE OF THE
SATELLITES AND TRANSPONDERS ON THE
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SATELLITES, TO OBTAIN SUCH PARTY'S AGREEMENT TO AN EQUIVALENT LIMITATION OF
LIABILITY WITH RESPECT TO LORAL AND THE OTHER PARTY HERETO AND THEIR
SUBCONTRACTORS AND SUPPLIERS AT ANY TIER; PROVIDED, HOWEVER, THAT NEITHER PARTY
SHALL HAVE ANY LIABILITY TO THE OTHER FOR ITS FAILURE TO OBTAIN SUCH LIMITATIONS
OF LIABILITY.
WITHOUT LIMITING THE FOREGOING, IN NO EVENT SHALL TELESAT BE LIABLE FOR ANY
INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER FORESEEABLE OR NOT, OCCASIONED BY
ANY DEFECT IN THE SATELLITES, THE TRANSPONDERS ON THE SATELLITES OR THE
DELIVERABLE ITEMS, FAILURE OF THE SATELLITES OR THE TRANSPONDERS ON THE
SATELLITES OR THE DELIVERABLE ITEMS TO PERFORM OR ANY OTHER CAUSE WHATSOEVER.
TELESAT MAKES NO WARRANTY, EXPRESS OR IMPLIED, TO ANY OTHER PERSON OR ENTITY
CONCERNING THE SATELLITES OR THE TRANSPONDERS ON THE SATELLITE OR THE
DELIVERABLE ITEMS.
SECTION 13. ADDITIONAL COVENANTS.
13.1 Conduct of Business. Once its Required Consents are obtained,
-------------------
each Party will maintain, comply with and preserve in full force and effect
during the Term and any renewal, its Required Consents and will not breach or
violate the same; except where the failure to maintain, comply or preserve, or
the breach or violation, would not have a material adverse effect on such
Party's ability to perform its obligations hereunder. Each Party will give
prompt written notice to the other Party of (a) the issuance of any citation or
order relating to its Required Consents that would have a material adverse
effect on its ability to perform its obligations under this Agreement, (b) any
lapse, suspension, revocation, rescission or other termination of its Required
Consents, (c) any notice to such Party of an alleged breach or violation by such
Party or any other Person of its Required Consents, (d) any proceedings related
to such Party's Required Consents if the outcome of such proceedings could have
a material adverse effect on such Party's ability to perform its obligations
hereunder or (e) any refusal of any Person to grant, renew or extend such
Party's Required Consents; except where any such lapse, suspension, revocation,
rescission, other termination, breach, violation, proceedings or refusal under
the foregoing paragraphs (b), (c), (d) and (e) would not have a material adverse
effect on such Party's ability to perform its obligations under this Agreement.
13.2 Maintenance of Required Consents. Once its Required Consents
--------------------------------
are obtained, each Party will (a) take all steps necessary or proper to preserve
its Required Consents and to remain qualified to hold the Required Consents, and
will timely file or cause to be filed with the appropriate Governmental
Authorities, any and all applications, reports and other information required by
applicable Legal Requirements or as otherwise may be necessary or appropriate to
maintain the Required Consents; (b) take such actions as may be necessary or
appropriate to prosecute the Required Consents before the applicable
Governmental Authorities and defend the Required Consents against any
unfavorable actions by or before any
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<PAGE>
Governmental Authority. During the term of this Agreement, each Party will (x)
apply for any additional authorizations, permits, licenses or consents necessary
to carry out its obligations hereunder, including, in the case of Telesat,
modifications and additions to the Telesat Required Consents from Canadian
Governmental Authorities or Persons as may be necessary to enable TCI to use the
TCI Transponders to transmit television programming and other services into the
United States and (y) not cancel, transfer or assign any of its Required
Consents, except as provided herein. Each Party will provide copies to the other
Party of any and all applications, filings, requests for modifications or other
documents to be submitted to any Governmental Authority in connection with the
Required Consents and will give the other Party an opportunity to comment on any
aspects of the same that affect such Party reasonably prior to their submission,
and simultaneously with submission thereof, will provide a copy thereof to the
other Party. Each Party agrees to assist the other Party in maintaining its
Required Consents.
13.3 Notification of Certain Matters. Each of TCI and Telesat
-------------------------------
will promptly notify the other, from time to time up to the Closing, of any
fact, event, circumstance or action (a) which, if known on the date of this
Agreement, would have been required to be disclosed to the other pursuant to
this Agreement or (b) the existence or occurrence of which would cause any of
TCI's or Telesat's, as the case may be, representations or warranties under this
Agreement not to be correct and complete in all material respects if they were
made as of such date.
13.4 Transfer Taxes. Telesat will be responsible for the payment
--------------
of any federal, provincial or local sales, use, transfer, excise, documentary or
license taxes or fees or any other charge (including filing fees) imposed by any
Canadian Governmental Authority with respect to the transfer of the TCI
Transponders pursuant to this Agreement; provided, that in no event will Telesat
be responsible for the payment of any income taxes to which TCI may be subject.
TCI will be responsible for the payment of any federal, state or local sales,
use, transfer, excise, documentary or license taxes or fees or any other charge
(including filing fees) imposed by any United States Governmental Authority with
respect to the transfer of the TCI Transponders pursuant to this Agreement;
provided, that in no event will TCI be responsible for the payment of any income
taxes to which Telesat may be subject.
13.5 Satisfaction of Conditions. Each Party will assist the other
--------------------------
Party in satisfying the conditions to the obligations of such other Party to
consummate the transactions contemplated by this Agreement; provided, that in
the case of the Required Consents, such Required Consents are on terms and
conditions reasonably satisfactory to each Party. Without limiting the
foregoing, each Party agrees to assist the other Party in its efforts to obtain
the Required Consents applicable to such Party.
13.6 Confidentiality Regarding Terms and Existence of Agreement;
-----------------------------------------------------------
Confidential Information.
- ------------------------
(a) Neither Party will issue any press release or make any
other public announcement regarding this Agreement or the transactions
contemplated hereby without the
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consent of the other Party. Each Party will hold, and will cause its employees,
consultants, advisors and agents to hold, in confidence, the terms of this
Agreement, except to the extent the terms of this Agreement are or become a
matter of public record and provided further that TCI may disclose the existence
and terms of this Agreement (including the Telesat Access Requirements) to any
Person to whom TCI leases, subleases or intends to lease or sublease all or any
portion of the TCI Transponders, and may disclose the existence and terms of the
Telesat Access Requirements to any user or proposed user of the TCI
Transponders.
(b) Each Party agrees to hold all Confidential Information
received by it from the other Party pursuant to this Agreement or the Satellite
Purchase Agreement in confidence.
(c) A Party receiving Confidential Information shall use
such information only for the purpose of fulfilling its obligations under this
Agreement and the Satellite Purchase Agreement. Each document containing
Confidential Information which is circulated to employees or agents of a Party
receiving such information shall bear a legend to the effect that the
information contained therein is confidential to the disclosing Party and that
such information shall not be disclosed to other persons.
(d) Upon expiration or termination of this Agreement, or at
any other time, all Confidential Information in the possession of a Party shall,
if requested in writing by the Party that disclosed such information, be either
returned to the disclosing Party or, at the receiving Party's option, destroyed.
In all events, the receiving Party may retain a single copy of all Confidential
Information, as an archive record of the contents thereof, accessed solely in
the event of a dispute between the parties concerning such contents.
(e) The confidentiality and non-disclosure obligations set
forth in this Section 13.6 shall become effective with respect to any item of
Confidential Information immediately upon disclosure to the receiving Party and
shall continue during the Term and for a period of two years thereafter.
(f) Notwithstanding the other provisions of this Section
13.6, a Party may disclose the terms and existence of this Agreement and
Confidential Information to the extent required by any Legal Requirement
(including disclosure requirements under federal, provincial and state
securities laws) or as a condition of obtaining any Required Consent, but the
Party proposing to disclose such information will first notify and consult with
the other Parties concerning the proposed disclosure, to the extent reasonably
feasible. Each Party also may disclose the terms and existence of this Agreement
and Confidential Information to employees, consultants, advisors, agents and
actual or potential lenders whose knowledge is necessary to facilitate the
consummation of the transactions contemplated by this Agreement or the Satellite
Purchase Agreement; provided that such representatives will be required to
observe the terms of this Section 13.6. Each Party's obligation to hold
information in confidence will be satisfied if it exercises the same care with
respect to such information as it would exercise to preserve the confidentiality
of its own similar information.
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<PAGE>
13.7 No Liens, Use or Transfer. Telesat shall not create, assume
-------------------------
or permit to exist any Encumbrance upon, or sell, lease, assign or exchange, its
interest in the Satellites (excluding the Telesat Transponders) except for
Permitted Encumbrances.
13.8 No Merger, etc. Telesat shall not merge, consolidate,
--------------
liquidate, dissolve, dispose of assets (including by way of lease or similar
transaction), or enter into any agreement with respect thereto or with respect
to any joint operating or other transaction that would result in the transfer of
any equity interest in Telesat, directly or indirectly, or any part of the
business or assets of Telesat, if such action would in any way interfere with
the quiet enjoyment of TCI's rights hereunder.
13.9 Satellite Failure; Successor Satellites; Replacement
----------------------------------------------------
Satellites and Operation of a Single Satellite.
- ----------------------------------------------
(a) Upon a mutual determination by Telesat and TCI that a
Satellite Failure of either Satellite has occurred, Telesat may decommission
such Satellite.
(b) Telesat acknowledges that Loral is obligated to make
four attempts to deliver two Satellites on-orbit which satisfy the criteria of
Sections 10.2 or 10.3 of the BSS Construction Agreement. If there is a Satellite
Failure, as defined in Subsection 1.40 of the BSS Construction Agreement and
Delivery (as defined in the BSS Construction Agreement) has not yet occurred for
such Satellite, or in the event Satellite No.1 (as defined in the BSS
Construction Agreement) fails to be placed into its assigned orbital location,
Loral shall, at its own risk and expense, deliver to Tempo a replacement
Satellite on-orbit no later than twenty-nine months after the date of Satellite
Failure. The preceding also applies to Satellite No.2 (as defined in the BSS
Construction Agreement). Further, if a replacement Satellite launched pursuant
to the two immediately preceding sentences is a Satellite Failure prior to
Delivery, or if such Satellite fails to be placed into its assigned orbital
location, and Loral has not fulfilled its obligation to make four attempts to
deliver two Satellites, Loral shall, at its risk and expense, deliver to Tempo
another replacement Satellite on-orbit no later than twenty-nine months after
the date of replacement Satellite Failure. Tempo may, with the consent of
Telesat (not to be unreasonably withheld), use Satellite(s) which have not been
accepted pursuant to Sections 10.2 or 10.3 of the BSS Construction Agreement
consistent with the salvage and use measures available in Loral's satellite risk
insurance policy. If Loral fails to deliver any Satellites by the fifty-fourth
month from the Execution Date of the BSS Construction Agreement, or if two
successive Satellites are Satellites Failures, or if after four attempts Loral
fails to deliver two Satellites on-orbit which satisfy the criteria of Sections
10.2 or 10.3 of the BSS Construction Agreement, Tempo may terminate the BSS
Construction Agreement.
(c) If two Satellites are Successfully Delivered and one of
the two Satellites is subsequently determined to be a Satellite Failure, TCI may
instruct Telesat, on ten days' notice to commence operation of the remaining
Satellite in the 32 Transponder mode for
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the remainder of the Term or until the Successor Satellite is Successfully
Delivered and a transition of services is accomplished.
(d) If the BSS Construction Agreement results in the
delivery of only one Satellite Successfully Delivered or if one or both
Satellites Successfully Delivered are thereafter determined to be a Satellite
Failure, the Parties shall immediately proceed to negotiate agreements for a
successor satellite program. No later than five years prior to the expected
decommissioning of one or more of the Successfully Delivered Satellites, the
Parties shall commence negotiating agreements for a successor satellite program,
such negotiations to be concluded no less than four years prior to the expected
decommissioning, unless mutually agreed otherwise. Telesat and TCI will use
their best efforts to obtain any necessary approvals and/or licenses in Canada
and the United States for successor DBS satellites at the 82 degrees WL orbital
position and to enter into agreements with each other for use of successor
generation satellites on terms and conditions essentially similar to this
Agreement and the Satellite Purchase Agreement. While the parties acknowledge
that changes in political and geographic boundaries, technology and regulatory
policy may necessitate modifications of this Agreement's and the Satellite
Purchase Agreement's terms and conditions for a successor agreement, Telesat
acknowledges that TCI will have executed this Agreement and Tempo will have
executed the Satellite Purchase Agreement relying on Telesat's best efforts to
obtain successor license rights and to lease or sell, as the case may be, like
capacity to TCI on like economic terms and conditions. The performance
specifications of any successor generation satellites shall be mutually agreed
between Telesat and TCI.
(e) If the Parties are unable to reach an agreement with
respect to successor satellite(s) and Telesat elects to operate a Satellite
after TCI has discontinued its use of the TCI Transponders on such Satellite or
after a Satellite has been determined to be a Satellite Failure (with or without
the benefit of north/south stationkeeping at another orbital location or at 82
degrees WL), or if pending the successful launch of successor satellite(s),
Telesat elects to operate a Satellite after TCI has discontinued its use of the
TCI Transponders on such Satellite or after a Satellite has been determined to
be a Satellite Failure as specified above, the Parties shall negotiate in good
faith an agreement to share 50/50 in the revenues generated by the sale of
capacity on the Satellite and the Transponders to Third Parties. Upon the sale
of a Satellite and the Transponders thereon for salvage value, the Parties shall
negotiate in good faith an agreement to share 50/50 in the revenues generated by
such sale for salvage value.
13.10 Insurance. Telesat will notify TCI prior to obtaining,
---------
renewing or replacing any insurance in connection with its ownership of the
Telesat Transponders or its operation of the Satellites. If TCI desires to
obtain insurance in connection with its ownership of the TCI Transponders either
at the time Telesat gives notice to TCI pursuant to the first sentence of this
Section or at any other time, TCI and Telesat will negotiate in good faith with
the goal of submitting a joint insurance proposal to the insurance market;
provided, that if the Parties are unable to reach agreement on the terms of a
joint insurance proposal within a reasonable period of time, either party may
separately obtain the insurance it desires. If the Parties submit a joint
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insurance proposal to the insurance market and there is not sufficient insurance
available in the market to cover the total amount of insurance coverage
requested in such joint insurance proposal, then either (i) the Parties may
revise such joint insurance proposal to request the level of insurance that is
available, with the amount of insurance to be requested by each Party being
prorated between them based on the amount of insurance requested by each Party
in the initial joint insurance proposal or (ii) either Party may separately
obtain the insurance it desires. Telesat agrees to provide to TCI such
information regarding the Satellites as TCI may reasonably request in connection
with any attempt by TCI to obtain insurance on its own.
13.11 [*****]
-------
(a)[*****]
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<PAGE>
13.12 Warranty Claims Against Loral.
-----------------------------
(a) Each of TCI and Telesat shall promptly give notice to
the other of (i) any matter which it determines may give rise to a right of
payment or other claim against Loral under Article 15 of the BSS Construction
Agreement (a "Loral Warranty Claim"), specifying with reasonable particularity
the relevant facts and approximate estimate, calculated in good faith, of the
amount of the potential liability; and (ii) the occurrence of any other material
event pertaining to potential Loral Warranty Claims.
(b) Each of TCI and Telesat shall provide, subject to any
solicitor/client privilege, each other with copies of all pleadings, notices,
affidavits, transcripts, productions, orders, judgments and other documents
pertaining to Loral Warranty Claims immediately upon request thereof by TCI or
Telesat, as the case may be. Each of TCI and Telesat shall keep each other
informed of any relevant developments related to the Loral Warranty Claims and
otherwise cooperate with each other in such claim, make available to the other
all witnesses, pertinent records, materials and information in its possession or
under its control, make such assignments and take such other steps as may be
reasonably required by the moving party to conduct such action and make such
claim.
(c) Any payments made by Loral and received by Telesat in
respect of Loral Warranty Claims ("Warranty Claim Payments") will be treated as
a reduction in the Satellite Purchase Price. Following each such Warranty Claim
Payments, [*****]
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<PAGE>
If either TCI or Telesat shall at any time receive any payment in respect
of any claim, counterclaim or settlement of any Loral Warranty Claim to which
all or part of such payment the other Party is entitled hereunder, TCI or
Telesat, as the case may be, shall hold such payment or part thereof in trust
for the other Party and shall forthwith pay over such amount to the other.
(d) Telesat will not settle any Loral Warranty Claim that
relates to the TCI Transponders or allow any right of appeal of any order or
judgement resulting therefrom to lapse without the prior written consent of TCI.
TCI will not settle any Loral Warranty Claim that relates to the Satellites, the
Telesat Transponders or any Deliverable Item other than the Two-Channel
Transponder Simulator or allow any right of appeal of any order or judgement
resulting therefrom to lapse without the prior written consent of Telesat.
13.13 Indemnity Claims Against Loral.
------------------------------
(a) Each of TCI and Telesat shall promptly give notice to
the other of (i) any matter which it determines may give rise to a right of
payment or other claim against Loral under Article 18 of the BSS Construction
Agreement (a "Loral Indemnity Claim"), specifying with reasonable particularity
the relevant facts and approximate estimate, calculated in good faith, of the
amount of the potential liability; and (ii) the occurrence of any other material
event pertaining to potential Loral Indemnity Claims.
(b) Each of TCI and Telesat shall provide, subject to any
solicitor/client privilege, each other with copies of all pleadings, notices,
affidavits, transcripts, productions, orders, judgments and other documents
pertaining to Loral Indemnity Claims immediately upon request thereof by TCI or
Telesat, as the case may be. Each of TCI and Telesat shall keep each other
informed of any relevant developments related to the Loral Indemnity Claims and
otherwise cooperate with each other in such claim, make available to the other
all witnesses, pertinent records, materials and information in its possession or
under its control, make such assignments and take such other steps as may be
reasonably required by the moving party to conduct such action and make such
claim.
(c) If the normal intended use, lease or sale of a
Satellite is enjoined as a result of an Intellectual Property Claim or is
otherwise prohibited and Loral is unable to accomplish one of the remedies
specified in Section 18.2(i), (ii) and (iii) of the BSS Construction Agreement
(the happening of both such events being referred to herein as an "Intellectual
Property Injunction"), Telesat, with the prior written consent of TCI, will
return such Satellite to Loral in accordance with the provisions of the Loral
Side Agreement and Section 18.2 of the BSS Construction Agreement if such
Intellectual Property Injunction is no longer subject to further proceedings or
review at any administrative or judicial level and as to which no stay has
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been granted or request for stay is pending. Any payment refund made by Loral
pursuant to Section 18.2 of the BSS Construction Agreement shall be shared by
Telesat and TCI in the following proportions: [*****]. If either TCI or
Telesat shall at any time receive any payment refund from Loral pursuant to
Section 18.2 of the BSS Construction Agreement to which all or part of such
payment the other Party is entitled hereunder, TCI or Telesat, as the case may
be, shall hold such payment or part thereof in trust for the other Party and
shall forthwith pay over such amount to the other.
13.14 Exhibits. The Parties acknowledge that this Agreement is
--------
being signed without Exhibit F being attached hereto. Each Party agrees to
negotiate in good faith with the other Party and to use its reasonable
commercial efforts to complete Exhibit F to this Agreement by May 31, 1996.
SECTION 14. CLOSING.
The First Closing under this Agreement will be held on the First
Closing Date under the Satellite Purchase Agreement (as defined therein),
provided that all other conditions to the First Closing contained in this
Agreement (other than those based on acts to be performed at the First Closing),
have also been satisfied or waived. If the Second Closing occurs under the
Satellite Purchase Agreement (as defined therein), a Second Closing under this
Agreement will be held on the Second Closing Date under the Satellite Purchase
Agreement, provided that all other conditions to the Second Closing contained in
this Agreement (other than those based on acts to be performed at the Second
Closing), have also been satisfied or waived. The First Closing, and if
applicable, the Second Closing, will be held at 10:00 a.m. local time at the
offices of Stikeman, Elliott in Toronto, or will be conducted by mail or at such
place and time as TCI and Telesat may agree.
SECTION 15. CONDITIONS TO CLOSING.
15.1 Conditions to the Obligations of the Parties. The obligations
--------------------------------------------
of each Party to consummate the transactions contemplated by this Agreement to
take place at each Closing are subject to the satisfaction at or prior to each
Closing Date of each of the following conditions or the waiver in writing by
both Parties of such conditions:
(a) Closing under the Satellite Purchase Agreement with
respect to such Closing Date shall have occurred.
15.2 Conditions to Obligations of TCI. The obligation of TCI to
--------------------------------
consummate the transactions contemplated by this Agreement to take place at each
Closing are subject to the satisfaction at or prior to the applicable Closing
Date of each of the following conditions or the waiver in writing by TCI of such
conditions:
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(a) TCI shall have received from Telesat an Assignment
Agreement in the form attached to this Agreement as EXHIBIT A.
15.3 Conditions to Obligations of Telesat. The obligation of
------------------------------------
Telesat to consummate the transactions contemplated by this Agreement to take
place at each Closing are subject to the satisfaction at or prior to the
applicable Closing Date, of each of the following conditions or the waiver in
writing by Telesat of such conditions:
(a) Telesat shall have received the Guarantee or letter of
credit required to be delivered at such Closing pursuant to Section 7.9.
(b) Telesat shall have received from TCI the Security
Agreement in the form attached as EXHIBIT E .
SECTION 16. TERMINATION.
16.1 Termination Prior to First Closing. If the Satellite
----------------------------------
Purchase Agreement is terminated pursuant to Section 11.1 of the Satellite
Purchase Agreement, this Agreement shall automatically terminate without further
action on the part of either Party hereto.
16.2 Termination Following First Closing. If the Satellite
-----------------------------------
Purchase Agreement is terminated as to the Second Closing thereunder pursuant to
Section 11.2 thereof, this Agreement shall terminate as to the transactions
contemplated by Section 4.1(b) of this Agreement without further action on the
part of either Party hereto.
16.3 Liabilities in Event of Termination. Upon termination of this
-----------------------------------
Agreement as a result of the termination of the Satellite Purchase Agreement
pursuant to Section 11.1(a), 11.1(b) or 11.1(c) thereof, the Parties shall have
no further obligations or liabilities to each other hereunder except pursuant to
Section 13.6. The termination or expiration of this Agreement for any other
reason will in no way limit any obligation or liability of either Party based on
or arising from a breach or default by such Party with respect to any of its
representations or warranties contained in this Agreement, or with respect to
any of its covenants or agreements contained in this Agreement which by their
terms were to be performed prior to the date of termination or expiration, nor
shall any such termination or expiration release either Party from its
liabilities or obligations under Section 13.6 or Section 17 to the extent
applicable to obligations arising prior to termination.
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16.4 Post-Closing Termination by Telesat.
-----------------------------------
(a) If TCI:
(i) shall fail to pay, or the guarantor under the
Guarantee shall fail to pay on behalf of TCI, any Operating Fees within 45 days
after TCI's receipt of written notice from Telesat of late payment; or
(ii) shall (w) generally not pay its debts as such
debts become due; (x) admit in writing its inability to pay its debts generally,
or shall make a general assignment for the benefit of creditors; (y) institute
or have instituted against it any proceeding seeking (1) to adjudicate it a
bankrupt or insolvent, (2) any liquidation, winding-up, reorganization,
arrangement, adjustment, protection, relief or composition of it or its debts
under any Legal Requirement relating to bankruptcy, insolvency or reorganization
or relief of debtors, or (3) the entry of an order for relief or the appointment
of a receiver, trustee or other similar official for it or for any substantial
part of its assets, and in the case of any such proceeding instituted against it
(but not instituted by it), either such proceeding shall remain undismissed or
unstayed for a period of 45 days, or any of the actions sought in such
proceeding (including the entry of an order for relief against it or the
appointment of a receiver, trustee, custodian or other similar official for it
or for any substantial part of its assets) shall occur; or (z) take any
corporate action to authorize any of the foregoing actions;
then Telesat may declare all remaining Operating Fees owing by TCI hereunder to
be immediately due and payable, without presentment, demand, protest or further
notice of any kind, all of which are expressly waived by TCI and the obligations
of Telesat to TCI under this Agreement with respect to the period after
termination shall immediately terminate. Upon such declaration, Telesat may
exercise such rights and remedies and commence such legal action or proceedings
as it, in its sole discretion, may deem expedient, including the commencement of
enforcement proceedings under the Security Agreement or any other security
granted by TCI or others to Telesat or any combination thereof, all without
additional notice, presentation, demand, protest, notice of dishonor, entering
into of possession of any property or any other action, notice of all of which
TCI hereby expressly waives except to the extent Telesat is required to give
notice under the Security Agreement.
(b) Telesat may terminate this Agreement
(i) upon 40 days prior written notice if performance
of this Agreement by Telesat pursuant to the terms hereof has been prohibited by
any Governmental Authority and such prohibition is no longer subject to further
proceedings or review at any administrative or judicial level and as to which no
stay has been granted or request for stay is pending or
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<PAGE>
(ii) immediately if an Intellectual Property
Injunction has been issued and such injunction is no longer subject to further
proceedings or review at any administrative or judicial level and as to which no
stay has been granted or request for stay is pending. Prior to any termination
by Telesat pursuant to Section 16.4(b)(i), Telesat and TCI shall negotiate in
good faith to amend this Agreement so that performance of the terms of this
Agreement by Telesat shall no longer be prohibited by any Governmental
Authority; provided, that neither Telesat or TCI shall be required to enter into
an amendment which would materially diminish the economic benefits to be
received by such Party under the terms of this Agreement. [*****]
16.5 Post-Closing Termination by TCI. TCI may terminate this
-------------------------------
Agreement (a) upon 40 days prior written notice if performance of this Agreement
by TCI pursuant to the terms hereof or the use by TCI of the TCI Transponders in
accordance with this Agreement (e.g., to transmit television programming and
other services into the United States) has been prohibited by any Governmental
Authority and such prohibition is no longer subject to further proceedings or
review at any administrative or judicial level and as to which no stay has been
granted or request for stay is pending or (b) immediately if an Intellectual
Property Injunction has been issued and such injunction is no longer subject to
further proceedings or review at any administrative or judicial level and as to
which no stay has been granted or request for stay is pending. Prior to any
termination by TCI pursuant to Section 16.5(a), Telesat and TCI shall negotiate
in good faith to amend this Agreement so that performance of the terms of this
Agreement by TCI shall no longer be prohibited by any Governmental Authority;
provided, that neither Telesat or TCI shall be required to enter into an
amendment which would materially diminish the economic benefits to be received
by such Party under the terms of this Agreement. [*****]
16.6 Rights and Remedies. Subject to the limitations on liability
-------------------
and remedies set forth in Section 12 of this Agreement, the rights and remedies
of Telesat and TCI under this Section 16 are cumulative and are in addition to
and not in substitution for any other rights or remedies.
16.7 Interest on Overdue Amounts.
---------------------------
(a) Any amount of the Operating Fees or any other amount
owing hereunder which is not paid when due (whether by acceleration or
otherwise) shall bear interest (both before and after judgment) from the date on
which such amount is due until such amount is paid in full at a rate per annum
equal to the per annum rate of interest quoted by National Bank
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<PAGE>
of Canada as the reference rate of interest for loans in U.S. Dollars to its
Canadian borrowers (adjusted automatically with each quoted or published change
in such rate) in effect from time to time plus 2% calculated daily and payable
on demand.
(b) All computations of interest shall be made by taking
into account the actual number of days occurring in the period for which such
interest is payable and on the basis of a year of 365 or 366 days, as the case
may be.
SECTION 17. INDEMNIFICATION.
17.1 Indemnification by Telesat. Subject to the limitations on
--------------------------
liability set forth in Section 12 of this Agreement, Telesat will indemnify,
defend and hold harmless TCI and its shareholders and their respective
Affiliates, and the shareholders, directors, officers, employees, agents,
successors and assigns of any of such Persons (the "TCI Indemnitees"), from and
against:
(a) all losses, damages, liabilities, deficiencies or
obligations of or to any of the TCI Indemnitees resulting from or arising out of
(i)any representation or warranty made by Telesat in this Agreement not being
true and accurate in all material respects when made or, in the case of any
representation or warranty which is qualified by its terms by a materiality
requirement, not being true and accurate when made, (ii) any material breach of
any covenant, agreement or obligation of Telesat contained in this Agreement or
the Loral Side Agreement, or, in the case of any agreement, covenant or
obligation contained in this Agreement or the Loral Side Agreement which is
qualified by a limitation that performance need only be material, any breach of
such agreement, covenant or obligation, including any claim by Loral against TCI
or Tempo which arises out of the same, (iii) any interference or disruption of
communications arising out of the use by Telesat or any other Person including
its lessees or transferees of the Telesat Transponders, or (iv) claims for
libel, slander, infringement, or copyright or other intellectual property rights
arising from the use by Telesat or any other Person including its lessees or
transferees of the Telesat Transponders; and
(b) all claims, actions, suits, proceedings, demands,
judgments, assessments, fines, interest, penalties, costs and expenses
(including settlement costs and reasonable legal, accounting, experts' and other
fees, costs and expenses) incident or relating to or resulting from any of the
foregoing.
17.2 Indemnification by TCI. Subject to the limitations on
----------------------
liability set forth in Section 12 of this Agreement, TCI will indemnify, defend
and hold harmless Telesat and its shareholders and their respective Affiliates,
and the shareholders,, directors, officers, employees, agents, successors and
assigns of any of such Persons (the "Telesat Indemnitees"), from and against:
(a) all losses, damages, liabilities, deficiencies or
obligations of or to any of the Telesat Indemnitees resulting from or arising
out of (i) any representation or warranty
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<PAGE>
made by TCI in this Agreement not being true and accurate in all material
respects when made or, in the case of any representation or warranty which is
qualified by its terms by a materiality requirement, not being true and accurate
when made, (ii) any material breach of any covenant, agreement or obligation of
TCI contained in this Agreement or the Loral Side Agreement, or, in the case of
any agreement, covenant or obligation contained in this Agreement or the Loral
Side Agreement which is qualified by a limitation that performance need only be
material, any breach of such agreement, covenant or obligation, including any
claim by Loral against Telesat which arises out of the same, (iii) any
interference or disruption of communications arising out of the use by TCI or
any other Person of the TCI Transponders, or (iv) claims for libel, slander,
infringement, or copyright or other intellectual property rights arising from
the use by TCI or any other Person of the TCI Transponders; and
(b) all claims, actions, suits, proceedings, demands,
judgments, assessments, fines, interest, penalties, costs and expenses
(including settlement costs and reasonable legal, accounting, experts' and other
fees, costs and expenses) incident or relating to or resulting from any of the
foregoing.
17.3 Third Party Claims. Promptly after the receipt by any Person
------------------
entitled to indemnification hereunder of notice of any claim, action, suit or
proceeding by any Person who is not a Party to this Agreement (collectively, an
"Action"), which Action is subject to indemnification under this Agreement, such
Person (the "Indemnified Party") will give reasonable written notice to the
Party from whom indemnification is claimed (the "Indemnifying Party"). The
Indemnified Party will be entitled, at the sole expense and liability of the
Indemnifying Party, to exercise full control of the defense, compromise or
settlement of any such Action unless the Indemnifying Party, within a reasonable
time after the giving of such notice by the Indemnified Party, (a) notifies the
Indemnified Party in writing of the Indemnifying Party's intention to assume
such defense, (b) provides evidence reasonably satisfactory to the Indemnified
Party of the Indemnifying Party's ability to pay the amount, if any, for which
the Indemnified Party may be liable as a result of such Action and (c) retains
legal counsel reasonably satisfactory to the Indemnified Party to conduct the
defense of such Action. The other Party will cooperate with the Party assuming
the defense, compromise or settlement of any such Action in accordance with this
Agreement in any manner that such Party reasonably may request. If the
Indemnifying Party so assumes the defense of any such Action, the Indemnified
Party will have the right to employ separate counsel and to participate in (but
not control) the defense, compromise or settlement of the Action, but the fees
and expenses of such counsel will be at the expense of the Indemnified Party
unless (i) the Indemnifying Party has agreed to pay such fees and expenses, (ii)
any relief other than the payment of money damages is sought against the
Indemnified Party or (iii) the Indemnified Party will have been advised by its
counsel that there may be one or more defenses available to it which are
different from or additional to those available to the Indemnifying Party, and
in any such case that portion of the fees and expenses of such separate counsel
that are reasonably related to matters covered by the indemnity provided in this
Section will be paid by the Indemnifying Party. No Indemnified Party will settle
or compromise any such Action for which it is entitled to indemnification under
this Agreement
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<PAGE>
without the prior written consent of the Indemnifying Party, unless the
Indemnifying Party has failed, after reasonable notice, to undertake control of
such Action in the manner provided in this Section. No Indemnifying Party will
settle or compromise any such Action (A) in which any relief other than the
payment of money damages is sought against any Indemnified Party or (B) in the
case of any Action relating to the Indemnified Party's liability for any tax, if
the effect of such settlement would be an increase in the liability of the
Indemnified Party for the payment of any tax for any period beginning after the
applicable Closing Date, unless the Indemnified Party consents in writing to
such compromise or settlement.
SECTION 18. MISCELLANEOUS.
18.1 Private Parties. The Parties hereto acknowledge that the
---------------
terms of this Agreement have been privately offered and will be privately
furnished on a non-common carrier basis. The Parties do not regard any
representations, offers or undertakings made by the other hereunder to be in the
nature of offers of common carriage. No Party shall attempt, now or in the
future, to assert through legal process, directly or indirectly, that the
relationship hereunder between themselves involves common carriage
18.2 Parties Obligated and Benefited. Subject to the limitations
-------------------------------
set forth below, this Agreement will be binding upon the Parties and their
respective assigns and successors in interest and will inure solely to the
benefit of the Parties and their respective assigns and suc cessors in interest,
and no other Person will be entitled to any of the benefits conferred by this
Agreement. Without the prior written consent of the other Parties, no Party will
assign any of its rights under this Agreement or delegate any of its duties
under this Agreement; provided that (a) Telesat may, without the consent of TCI,
assign its rights to receive Operating Fees as security for obligations of
Telesat; and (b) TCI may, without the consent of Telesat, assign or delegate all
of its rights and obligations under this Agreement to Primestar or any Affiliate
of TCI; provided that (i) TCI gives prior written notice to Telesat and delivers
an assumption agreement of such assignee pursuant to which such assignee assumes
the obligations of TCI under this Agreement and the Security Agreement and
certifies (x) that it is either a Person constituted under U.S. federal or state
laws, or, to the extent that such Person is not a corporation, such Person's
members, partners or beneficiaries are incorporated under U.S. federal or state
laws, and (y) that it is a Person resident in the United States of America as
contemplated by the Canada-United States Tax Convention, 1980 or, to the extent
that such Person is not a corporation, such Person's members, partners or
beneficiaries are resident in the United States of America as contemplated by
the Canada-United States Tax Convention, 1980 and (ii) the current guarantor
under any Guarantee then in effect delivers a certificate to Telesat confirming
that the Guarantee remains in full force and effect notwithstanding such
assignment and (iii) in the event of such an assignment, TCI will not be
released from its obligations under this Agreement. If Telesat desires to assign
its right to receive Operating Fees or, with the consent of TCI, any other
rights or obligations under this Agreement, pursuant to and in accordance with
this Section 18.2, Telesat shall promptly provide TCI with written notice of
such assignment or proposed assignment and the name and address of the assignee
or proposed assignee (the "Assignee").
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<PAGE>
Within 30 days following TCI's receipt of such notice from Telesat, TCI shall
execute, issue and deliver to Telesat and the Assignee counterpart copies of an
instrument acknowledging that the Assignee has succeeded to the right of Telesat
to receive the Operating Fees due hereunder or, if TCI has consented to the
assignment of any other rights or obligations of Telesat, acknowledging that the
Assignee has succeeded to such other rights or obligations of Telesat. Any such
assignment shall be effective on the date that such counterpart copies of such
instrument are issued by TCI.
18.3 Notices. Any notice, request, demand, waiver or other
-------
communication required or permitted to be given under this Agreement will be in
writing and will be deemed to have been duly given only if delivered in person
or by first class, prepaid, registered or certified mail, or sent by courier or
by overnight delivery service, or, if receipt is confirmed, by telecopier:
To TCI at:
National Digital Television Center
4100 East Dry Creek Road
Littleton, CO 80122
Attention: David P. Beddow
Telephone: (303) 486-3815
Telecopy: (303) 486-3890
With copies to:
Tele-Communications, Inc.
5619 DTC Parkway
Englewood, CO 80111
Attention: Legal Department
Telephone: (303) 267-5500
Telecopy: (303) 488-3245
To Telesat at:
1601 Telesat Court
Gloucester, Ontario
CANADA K1B 5P4
Attention: Secretary
Telephone: 613-748-0123
Telecopy: 613-748-8784
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<PAGE>
Any Party may change the address to which notices are required to be sent by
giving notice of such change in the manner provided in this Section. All
notices will be deemed to have been received on the date of delivery or on the
third Business Day after mailing in accordance with this Section, except that
any notice of a change of address will be effective only upon actual receipt.
18.4 Attorneys' Fees. In the event of any action or suit based
---------------
upon or arising out of any alleged breach by any Party of any representation,
warranty, covenant or agreement contained in this Agreement, the prevailing
Party will be entitled to recover reasonable attorneys' fees and other costs of
such action or suit from the other Parties.
18.5 Right to Specific Performance. The Parties acknowledge that
-----------------------------
the unique nature of the TCI Transponders renders money damages an inadequate
remedy for the breach by Telesat of its obligations under this Agreement, and
the Parties agree that in the event of such breach, TCI will, upon proper action
instituted by it, be entitled to a decree of specific performance of this
Agreement.
18.6 Waiver. This Agreement or any of its provisions may not be
------
waived except in writing. The failure of any Party to enforce any right arising
under this Agreement on one or more occasions will not operate as a waiver of
that or any other right on that or any other occasion.
18.7 Captions. The section captions contained in this Agreement
--------
are for convenience only and do not constitute a part of this Agreement.
18.8 CHOICE OF LAW.
-------------
(a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE PROVINCE OF ONTARIO, WITHOUT REGARD TO THE
CONFLICTS OF LAWS RULES OF THE PROVINCE OF ONTARIO.
(b) Each Party hereby (i) irrevocably submits to the
jurisdiction of any court of competent jurisdiction sitting in the Province of
Ontario over any suit, action or proceeding arising out of or relating to this
Agreement; (ii) irrevocably agrees that all claims in respect of any such suit,
action or proceeding may be heard and determined in such court; and (iii)
irrevocably waives, to the fullest extent permitted by law, any objection which
it may have or hereafter have to the laying of the venue of any such suit,
action or proceeding brought in such a court and any claim that any such suit,
action or proceeding brought in such a court has been brought in an inconvenient
forum. Each party irrevocably consents to the service of any and all process in
any such action or proceeding by the delivery of such process to such Party at
the address specified for it in accordance with Section 18.3 of this Agreement.
Each Party agrees
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<PAGE>
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in any manner provided by law.
(c) Nothing in this Section 18.8 shall affect the right of
either Party to serve process in any manner permitted by law or limit the right
of any Party to bring proceedings against the other Party in the courts of any
other jurisdiction.
(d) Each Party hereby irrevocably waives, to the fullest
extent permitted by law, trial by jury.
(e) Nothing in this Section 18.8 shall constitute a waiver
by any Party of any right to (i) appeal any order or judgment referred to
herein; (ii) seek any stay or reconsideration or review of any such order or
judgment; or (iii) seek any stay of execution or levy pending any appeal from,
or a suit, action or proceeding for reconsideration or review of, any such order
or judgment.
18.9 Terms. Terms used with initial capital letters will have the
-----
meanings specified, applicable to both singular and plural forms, for all
purposes of this Agreement. The word "include" and derivatives of that word are
used in this Agreement in an illustrative sense rather than limiting sense and
the word "or" is not exclusive.
18.10 Rights Cumulative. Subject to the limitations on liability
-----------------
and remedies set forth in Section 12 of this Agreement, all rights and remedies
of each of the Parties under this Agreement will be cumulative, and the exercise
of one or more rights or remedies will not preclude the exercise of any other
right or remedy available under this Agreement or applicable law.
18.11 Further Actions. The Parties will execute and deliver to the
---------------
other, from time to time at or after the Closings, for no additional
consideration, such further assignments, certificates, instruments, records, or
other documents, assurances or things as may be reasonably necessary to give
full effect to this Agreement and to allow each Party fully to enjoy and
exercise the rights accorded and acquired by it under this Agreement, if such
requested further action will not impose any expense or material additional
obligations on the Party from whom such further action is requested.
18.12 Time. Time is of the essence under this Agreement. If the
----
last day permitted for the giving of any notice or the performance of any act
required or permitted under this Agreement falls on a day which is not a
Business Day, the time for the giving of such notice or the performance of such
act will be extended to the next succeeding Business Day.
18.13 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed an original.
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<PAGE>
18.14 Entire Agreement. References to this "Agreement" include the
----------------
Schedules, Exhibits and Attachments referred to in this Agreement, which are
incorporated in and constitute a part of this Agreement. This Agreement
supersedes all prior oral or written agreements between the Parties and
understandings between the Parties with respect to the subject matter of this
Agreement. This Agreement does not affect or supersede the Telesat Agreements
or the Loral Side Agreement. This Agreement may not be amended or modified
except by a writing signed by the Parties.
18.15 Severability. Any term or provision of this Agreement which
------------
is invalid or unenforceable will be ineffective to the extent of such invalidity
or unenforceability without rendering invalid or unenforceable the remaining
rights of the Person intended to be benefitted by such provision or any other
provisions of this Agreement.
18.16 Construction. This Agreement has been negotiated by TCI,
------------
Telesat and their respective legal counsel, and legal or equitable principles
that might require the construction of this Agreement or any provision of this
Agreement against the Party drafting this Agreement will not apply in any
construction or interpretation of this Agreement.
18.17 Expenses. Except as set forth in the second sentence of this
--------
Section 18.17 and as otherwise expressly provided in this Agreement, each Party
will pay all of its own expenses, including attorneys' and accountants' fees, in
connection with the negotiation of this Agreement, the performance of its
obligations and the consummation of the transactions contemplated by this
Agreement. TCI will reimburse Telesat for its reasonable outside legal expenses
associated with this Agreement if Tempo unilaterally terminates the Satellite
Purchase Agreement after Telesat delivers to Tempo the executed Telesat
Authorization Certificate and while such certificate remains in full force and
effect; provided, that the foregoing shall not apply if Tempo terminates the
Satellite Purchase Agreement following a material breach by Telesat of the
Satellite Purchase Agreement, or if the Satellite Purchase Agreement is
terminated pursuant to Section 11.1(b), Section 11.1(d) or Section 11.2 of such
agreement.
18.18 Counting of Days. References herein to a number of days
----------------
shall be deemed to refer to "calendar" and not Business Days unless the context
clearly indicates otherwise. If the last day permitted for the giving of any
notice or performance of any act required or permitted under this Agreement
falls on a day which is not a Business Day, the time for the giving of such
notice or the performance of such act shall be extended to the next succeeding
Business Day.
18.19 Waiver of Tax Warranties. No Party makes any representation
------------------------
or warranty, express or implied, with respect to the tax implications of any
aspect of the transactions contemplated under this Agreement on any other Party
to this Agreement and all Parties expressly disclaim any such representation or
warranty with respect to any tax consequences arising under this Agreement. Each
Party has relied solely on its own tax advisors with respect to the tax
implications of the transactions contemplated under this Agreement.
Notwithstanding the provisions of this Section 18.19, each Party may fully rely
on the
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<PAGE>
representations, warranties and covenants expressly made in this Agreement,
which will not be deemed waived or affected by this Section 18.19.
18.20 Characterization of this Transaction. The Parties hereby
------------------------------------
agree that the transactions contemplated by this Agreement and the Satellite
Purchase Agreement will be recorded and reported for all purposes, including
without limitation for tax purposes, as (i) the acquisition by Telesat of the
Satellites for an amount equal to the Satellite Purchase Price; (ii) the
disposition by Telesat, and the acquisition by TCI, of TCI Transponders for an
amount equal to the Transponder Purchase Price; and (iii) the undertaking by TCI
to subscribe for and pay quarterly Operating Fees, for 48 consecutive quarters,
in consideration of the services provided by Telesat under this Agreement. For
greater certainty, TCI agrees not to capitalize the Operating Fees, or any
portion thereof, for the purpose of claiming depreciation for United States tax
purposes.
18.21 Quiet Enjoyment. Telesat covenants that so long as TCI has
---------------
paid all amounts due and is otherwise in compliance with the terms, covenants
and conditions on its part to be performed under this Agreement, TCI's use and
enjoyment of the TCI Transponders will not be disturbed during the term of this
Agreement, it being agreed that this covenant of quiet enjoyment given by
Telesat shall be interpreted and applied in accordance with the principles of
quiet enjoyment applicable to real estate leases.
18.22 No Joint Venture. The parties agree that the provisions of
----------------
this Agreement shall not operate to constitute TCI and Telesat as joint
venturers or partners or in any other relationship other than independent
parties entering into an arms-length agreement with respect to the transactions
contemplated hereby.
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<PAGE>
The Parties have executed this Agreement as of the day and year
first above written.
TCI TECHNOLOGY VENTURES, INC.
By:________________________________
Name:______________________________
Title:_____________________________
TELESAT CANADA
By:________________________________
Name:______________________________
Title:_____________________________
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EXHIBIT A
---------
ASSIGNMENT
----------
This Assignment (this "Assignment") is made as of the ____ day of
____________, 199__, by Telesat Canada, a corporation organized and existing
under the laws of the Province of Ontario ("Assignor") in favor of TCI
Technology Ventures, Inc., a Delaware corporation ("Assignee").
RECITALS
This Assignment is delivered pursuant to the requirements of the
Operating Services Agreement dated as of May 6, 1996 between Assignor and
Assignee (the "Operating Services Agreement"). Capitalized terms not otherwise
defined herein shall have the meanings given to such terms in the Operating
Services Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the consideration specified in the Operating
Services Agreement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Assignor does hereby convey,
grant, bargain, sell, transfer, and assign unto Assignee, its successors and
assigns, all of the right, title and interest of Assignee in and to [Describe
transponders], free and clear of all Encumbrances, except Permitted
Encumbrances.
ANY AND ALL EXPRESS AND IMPLIED WARRANTIES WITH RESPECT TO THE
SATELLITES, THE TRANSPONDERS THEREON, AND THE DELIVERABLE ITEMS, INCLUDING, BUT
NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PURPOSE OR USE,
ARE EXPRESSLY EXCLUDED AND DISCLAIMED.
Nothing contained in this Assignment shall increase the liability
of Assignor to Assignee beyond the liability that Assignor has under the
Operating Services Agreement and any action brought by Assignee with respect to
this Assignment shall be subject to the limitations on liabilities and remedies
set forth in the Operating Services Agreement.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Assignment
effective as of the date first written above.
ASSIGNOR:
TELESAT CANADA
By:____________________________________
Name:__________________________________
Title:_________________________________
and
By:____________________________________
Name:__________________________________
Title:_________________________________
<PAGE>
Exhibit 4.6.3
AMENDMENT OF
LIMITED PARTNERSHIP AGREEMENT OF
PRIMESTAR PARTNERS L.P.
THIS AMENDMENT OF LIMITED PARTNERSHIP AGREEMENT OF PRIMESTAR PARTNERS
L.P. (formerly K Prime Partners, L.P.), a limited partnership organized under
the laws of Delaware pursuant to the Limited Partnership Agreement dated
February 8, 1990, as previously amended (the "Agreement") and having its
principal place of business at Bala Cynwyd, Pennsylvania (the "Partnership"), is
made and entered into effective as of October 18, 1996, by all of the
Representatives on the Partners Committee (as those terms are defined in the
Agreement).
W I T N E S S E T H:
WHEREAS, the Partnership and GE American Communications, Inc., a
corporation organized under the laws of Delaware having its principal place of
business at Princeton, New Jersey ("GE"), are entering into an Amended and
Restated Memorandum of Agreement (the "MOA") of substantially even date herewith
and, as provided therein, propose to enter into a Service Agreement, pursuant to
which MOA and Service Agreement GE would provide, and the Partnership would
take, transponder service on the communications satellite denominated as GE-2
and potentially other GE satellites which the Partnership intends to use to
provide services to its subscribers;
WHEREAS, GE and the Partnership are entering into an Addendum
Regarding Letters of Credit of substantially even date herewith providing for
the issuance for the benefit of GE of letters of credit in connection with the
obligations of the Partnership under the MOA;
WHEREAS, the partners of the Partnership and GE also propose to enter
into a 1996 Ancillary Agreement in connection with the MOA and such Addendum;
and
WHEREAS, the parties hereto, pursuant to Section 13.11 of the
Agreement, wish to amend the Agreement as provided herein;
NOW, THEREFORE, in consideration of the foregoing and the covenants
and agreements hereinafter set forth, the undersigned, constituting all of the
Representatives, unanimously agree as follows:
1. Section 7.05, Actions of Partners Committee
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<PAGE>
Requiring Super-majority Vote, is hereby amended as of the date hereof by
deleting the word "or" at the end of subclause (r), by replacing the period at
the end of subclause (s) with a semicolon, and by adding at the end thereof the
following:
(t) exercise the End-of-Life Option (as defined in the MOA and
Service Agreement);
(u) otherwise take any action as a result of which the amount of
letters of credit required to be issued at any time for the
benefit of GE American Communications, Inc. ("GE") in
connection with the obligations of the Partnership under the
MOA or Service Agreement shall exceed $100,000,000;
(v) effect any amendment or modification of the Addendum which
increases, or has the same effect as increasing, any Letter
of Credit Amount specified in or determined pursuant to
Schedule 2 (Letter of Credit Amounts) to the Addendum or
effect any other material modification or amendment of the
Addendum;
(w) provide, or cause to be provided, one or more Optional
Letters of Credit (as defined in Article 3B of the
Addendum); or
(x) enter into any Reimbursement Agreement or pledge, grant a
security interest in or otherwise create a lien on any
material assets of the Partnership to secure
-2-
<PAGE>
the payment of reimbursement obligations of the Partnership
under a Reimbursement Agreement or effect any material
modification or amendment of any Reimbursement Agreement.
As used in the preceding sentence:
"MOA" means The Amended and Restated Memorandum of Agreement by and
between the Partnership and GE pursuant to which there is offered to
the Partnership transponder service on the communication satellite
denominated as GE-2 and potentially other satellites of GE, as the
same may be amended;
"Service Agreement" means the Service Agreement which, pursuant to the
MOA, the Partnership and GE propose to enter into to incorporate the
terms of the MOA, as such Service Agreement may be amended;
"Addendum" means the Addendum Regarding Letters of Credit of
substantially even date with the MOA by and between the Partnership
and GE, as the same may be amended, providing for the issuance for the
benefit of GE of letters of credit in connection with the MOA and
Service Agreement; and
"Reimbursement Agreement" means an agreement pursuant to which the
Partnership is obligated to reimburse the issuer of a letter of
credit, issued for the account of the Partnership and for the benefit
of GE in connection with the Addendum, for draws on such letter of
credit.
2. The following new Section 6.07(n) is added to the Agreement as of
the date hereof:
6.07(n) Curative Allocations. Notwithstanding any other
--------------------
provision of this Section 6.07, the Partners will be allocated items
of income, gain, loss and deduction, to the extent possible, so that
the net amount of items of income, gain, loss and deduction allocated
to each Partner pursuant to the Special Allocation Rules of Section
6.07 shall be equal to the net amount of such items that would have
been allocated to each such Partner had this Section 6.07 not been
applicable. Allocations pursuant to this Section 6.07(n) shall only
be made with respect to Special Allocations to the extent the Partners
Committee, by Majority Vote, reasonably determines that such Special
Allocations will otherwise be inconsistent with the economic agreement
-3-
<PAGE>
among the Members. The Partners Committee, by Majority Vote, shall
have reasonable discretion, with respect to each taxable period, to
(1) apply the provisions of Section 6.07(n) in whatever order is most
likely to minimize the economic distortions that might otherwise
result from this Section 6.07 and (2) divide all allocations pursuant
to Section 6.07(n) among the Partners in a manner that is likely to
minimize such economic distortions. Allocations pursuant to this
Section 6.07(n) shall only be made to the extent that they are
consistent with Code Section 704(b) and the Regulations promulgated
pursuant thereto.
3. The following new Section 5.03(e) is added to the Agreement as of
the date hereof:
5.03(e)(i) If a Partner (a "Defaulting Partner") fails to
provide or cause to be provided (at the time such increased amount is
first required) letters of credit for the account of such Partner (or
one or more of its Affiliates) in the increased amount (i.e., in
----
excess of the amount required in the absence of such transaction) of
such letters of credit required pursuant to a transaction described in
subclauses (t), (u), (v), (w) or (x) of Section 7.05 of this Agreement
(an "Approved Transaction"), such failure shall be treated for
purposes of this Section 5.03(e)(i) as a failure by the Defaulting
Partner to make an Additional Capital Contribution and, to the extent
so provided in Section 5.03(a) and Section 5.03(b),
(A) the Percentage Interest of the Defaulting Partner shall be
reduced as of the time of such failure to provide the letters of
credit, and the reduction shall be allocated to increase the
Percentage Interests of the other Partners that are not
Defaulting Partners, Non-Paying Partners or Sanctioned Partners,
(B) the Defaulting Partner shall lose its entitlement to appoint a
Representative to the Partners Committee to the extent such
Defaulting Partner's Partnership Interest falls below five
percent (5%) and its entitlement to participate in subsequent
calls for Additional Capital Contributions (other than to provide
or cause to be provided subsequent letters of credit and
subsequent increases in letters of credit required pursuant to an
Approved Transaction), and
(C) such Defaulting Partner shall be otherwise treated
-4-
<PAGE>
as a Non-Paying Partner whose Representative did not vote against
requiring the Partners to make the Additional Capital
Contribution.
Solely for purpose of determining the amount of the reduction in a
Defaulting Partner's Percentage Interest under this Section
5.03(e)(i), the provision of a letter of credit pursuant to an
Approved Transaction and any reduction by GE of the Required LC Amount
(as defined in the Addendum) described in the following sentence, each
shall be treated as an Additional Capital Contribution by GE Americom,
to the extent of any such reduction, and by the Partner providing a
letter of credit, to the extent the provision of such letter of credit
increases the face amount of letters of credit provided by or on
behalf of all Partners in excess of the face amount all Partners would
have been required to provide in the absence of such Approved
Transactions, as appropriate. The decrease in Percentage Interest of
the Defaulting Partner described in the immediately preceding sentence
shall be allocated among the Partners, other than GE Americom, that
provide letters of credit in lieu of an increase in the Defaulting
Partner's letter of credit, and GE Americom, if GE elects to reduce
the Required LC Amount, as follows:
(x) GE's reduction in the Required LC Amount will be treated
as the provision of a letter of credit by GE Americom in lieu of
the increase in the Defaulting Partner's letter of credit to the
extent such reduction by GE reduces the amount of the increase in
the face amount of a Defaulting Partner's letter of credit; and
(y) the Percentage Interest of each of the Partners
(including GE Americom if the preceding clause (x) is applicable)
that provide letters of credit in lieu of an increase in the
Defaulting Partner's letter of credit shall be increased by an
amount equal to (i) the total reduction in the Defaulting
Partner's Percentage Interest, multiplied by (ii) the result of
dividing (A) such Partner's increase in letter of credit in lieu
of any increase in the letter of credit of a Defaulting Partner
by (B) the total of such increases for all such Partners.
In addition, the Defaulting Partner shall be required to transfer a
portion of its ownership interest in the Partnership to the other
Partners in proportion to their relative Percentage Interests, such
that the Capital
-5-
<PAGE>
Accounts of the Partners following such transfer, as a whole,
appropriately reflect the reduction in Percentage Interests required
by this Section 5.03(e)(i). The method of accomplishing a transfer
described in the preceding sentence (i) shall be determined by the
Partners Committee, by Majority Vote, (ii) shall be effective as of
the time of the failure to provide such increased amount of letters of
credit by the Defaulting Partner, and (iii) shall be accomplished
without any further action of the Defaulting Partner or its
Affiliates.
(ii) If, with respect to an expiring Partner Primary LC or
Secondary LC, issued for the account of a Partner (or an Affiliate of
such Partner),
(A) such Partner (a "Non-Replacing Partner") fails to cause
the issuance of an increased, additional or replacement Partner
Primary LC or Secondary LC for such expiring letter of credit
(except in the case of, and to the extent of, a failure treated
in Section 5.03(e)(i) as a failure to make an Additional Capital
Contribution) in the manner and to the extent necessary for the
Partnership to be in compliance with Article 2A and Article 2B of
the Addendum or, in the case of a Secondary LC, the terms of a
Reimbursement Agreement (as each such term is defined in Section
7.05 of this Agreement) and
(B) such Partner Primary LC or Secondary LC expires without
being drawn upon in full,
then such failure shall be treated for purposes of this Section
5.03(e)(ii) as a failure by the Non-Replacing Partner to make an
Additional Capital Contribution and, to the extent so provided in
Section 5.03(a) and Section 5.03(b),
(x) the Percentage Interest of the Non-Replacing Partner
shall be reduced as of the time of such failure to provide the
letter of credit, and the reduction shall be allocated to
increase the Percentage Interests of the other Partners that are
not Non-Replacing Partners, Non-Paying Partners or Sanctioned
Partners,
(y) the Non-Replacing Partner shall lose its entitlement to
appoint a Representative to the Partners Committee to the extent
such Non-Replacing Partner's Partnership Interest falls below
five
-6-
<PAGE>
percent (5%) and its entitlement to participate in subsequent
calls for Additional Capital Contributions (other than to provide
or cause to be provided subsequent letters of credit and
subsequent increases in letters of credit required pursuant to an
Approved Transaction), and
(z) such Non-Replacing Partner shall be otherwise treated
as a Non-Paying Partner whose Representative did not vote against
requiring the Partners to make the Additional Capital
Contribution.
Solely for purpose of determining the amount of the reduction in a
Non-Replacing Partner's Percentage Interest under this Section
5.03(e)(ii), the provision of a letter of credit in lieu of the letter
of credit of the Non-Replacing Partner which is the subject of such
failure and any reduction by GE of the Required LC Amount (as defined
in the Addendum) described in the following sentence, each shall be
treated as an Additional Capital Contribution by GE Americom, to the
extent of any such reduction, and by the Partner providing a letter of
credit, to the extent such letter of credit increases the face amount
of letters of credit provided by or on behalf of each Partner in
excess of the face amount such Partner would have been required to
provide in the absence of such failure, as appropriate. The decrease
in Percentage Interest of the Non-Replacing Partner described in the
immediately preceding sentence shall be allocated among the Partners,
other than GE Americom, that provide letters of credit in lieu of the
Non-Replacing Partner's letter of credit, and GE Americom, if GE
elects to reduce the Required LC Amount, as follows:
(a) GE's reduction in the Required LC Amount will be
treated as the provision of a letter of credit by GE Americom in
lieu of the Non-Replacing Partner's letter of credit to the
extent such reduction by GE reduces the Required LC Amount by
some or all of the face amount of a Non-Replacing Partner's
letter of credit; and
(b) the Percentage Interest of each of the Partners
(including GE Americom if the preceding clause (a) is applicable)
that provide letters of credit in lieu of the Non-Replacing
Partner's letter of credit shall be increased by an amount equal
to (i) the total reduction in the Non-Replacing Partner's
Percentage Interest,
-7-
<PAGE>
multiplied by (ii) the result of dividing (A) such Partner's
increase in letter of credit in lieu of the letter of credit of a
Non-Replacing Partner by (B) the total of such increases for all
such Partners.
In addition, the Non-Replacing Partner shall be required to transfer a
portion of its ownership interest in the Partnership to the other
Partners, in proportion to their relative Percentage Interests, such
that the Capital Accounts of the Partners following such transfer, as
a whole, appropriately reflect the reduction in Percentage Interests
required by this Section 5.03(e)(ii). The method of accomplishing a
transfer described in the preceding sentence (i) shall be determined
by the Partners Committee, by Majority Vote, (ii) shall be effective
as of the time of such failure to provide such letters of credit by
the Non-Replacing Partner, and (iii) shall be accomplished without any
further action of the Non-Replacing Partner or its Affiliates.
As used in this Section 5.03(e)(ii):
"Partner Primary LC" means a letter of credit issued for the account
of a Partner (or an Affiliate of such Partner) and for the benefit of
GE in connection with the Addendum (as defined in Section 7.05 of this
Agreement); and
"Secondary LC" means a letter of credit issued for the account of a
Partner (or an Affiliate of such Partner) and for the benefit of the
issuing bank pursuant to, and as security for the payment to such
issuing bank of the reimbursement obligations of the Partnership
under, a Reimbursement Agreement (as defined in Section 7.05 of this
Agreement).
(iii) In the event that there is a Defaulting Partner as
described in Section 5.03(e)(i) or a Non-Replacing Partner as
described Section 5.03(e)(ii), the other Partners that elect to
replace or provide a letter of credit, or to reduce the Required LC
Amount, in lieu of a Defaulting Partner or a Non-Replacing Partner as
described in Section 5.03(e)(i) or Section 5.03(e)(ii), shall allocate
the amount of the letter of credit provision, replacement or reduction
among them as they agree, or if they fail to agree, then in proportion
to their respective Percentage Interests.
4. Each reference in the Agreement to a section or
-8-
<PAGE>
provision of the Agreement shall be deemed to be a reference to the Agreement as
amended by this Amendment.
5. This Amendment shall be a part of the Agreement and shall be
governed by the provisions of the Agreement generally applicable to the
provisions thereof, including, without limitation, the provision of the
Agreement pursuant to which the rights and obligations of the parties hereto,
and any claims or disputes relating thereto, shall be governed by, and construed
in accordance with the laws of the State of Delaware (but not including the
choice of law rules thereof).
6. To facilitate execution, this Amendment may be executed in as
many counterparts as may be required; and it shall not be necessary that the
signatures of, or on behalf of, each party, or that the signatures of the
persons required to bind any party, appear on one or more of the counterparts.
All counterparts collectively shall constitute a single agreement. It shall not
be necessary in making proof of this Amendment to produce or account for more
than a number of counterparts containing the respective signatures of, or on
behalf of, all the parties hereto.
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment,
or have caused this Amendment to be duly executed on their behalf, as of the day
and year first herein above set forth.
Michael Tallent, a
Representative, on behalf of
Comcast DBS, Inc.
Jeff DeLorme, a Representative,
on behalf of Continental
Satellite Company, Inc.
Ajit Dalvi, a Representative,
on behalf of Cox Satellite,
Inc.
John Connelly, a Representative,
on behalf of G.E. Americom
Services, Inc.
-9-
<PAGE>
Daniel Cavallo, a Representative,
on behalf of New Vision Satellite
Gary Howard, a Representative,
on behalf of TCI K-1, Inc.
Daniel O'Brien, a Representative,
on behalf of TW Programming Co.
Gary Howard, a Representative,
on behalf of United Artists
K-1 Investments, Inc.
-10-
<PAGE>
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
-------------------------
Indemnification Agreement (this "Agreement"), dated as of
____________, 1996, between TCI Satellite Entertainment, Inc., a Delaware
corporation (the "Company") and TCI UA 1, Inc., a Colorado corporation (the
"Account Party").
RECITALS
A. Tele-Communications, Inc. ("TCI") owns all the issued and
outstanding capital stock of the Company (the "Company Stock"). TCI intends to
distribute (the "Distribution") the Company Stock to the holders of its Tele-
Communications, Inc. Series A TCI Group Common Stock and Tele-Communications,
Inc. Series B TCI Group Common Stock. As a result of the Distribution, the
Company will cease to be a subsidiary of TCI, and TCI and the Company will be
separate public companies.
B. The Account Party is a wholly owned subsidiary of TCI
Development Corporation, an indirect subsidiary of TCI. The Account Party has
arranged for the issuance by Chemical Bank (the "Issuing Bank") of its
Irrevocable Transferable Letter of Credit No. T-253097, dated February 26, 1996
(the "Letter of Credit"). The beneficiary of the Letter of Credit is Chemical
Bank, as Administrative Agent (the "Administrative Agent") under the Credit
Agreement dated as of March 9, 1994 (the "Credit Agreement") among PRIMESTAR
Partners, L.P. ("PRIMESTAR"), the Banks listed on the signature pages thereof,
The Bank of New York, Chemical Bank and Citibank, N.A., as Managing Agents, and
the Administrative Agent. The Letter of Credit provides collateral security for
the obligations of PRIMESTAR under the Credit Agreement. The Account Party is
obligated to reimburse the Issuing Bank for any drawings made under the Letter
of Credit pursuant to the Amended and Restated Reimbursement Agreement dated as
of March 1, 1995, only the Account Party, the Issuing Bank and The Toronto
Dominion Bank (the "Reimbursement Agreement"). The obligations of the Account
Party under the Reimbursement Agreement are secured by a pledge of certain
shares of capital stock of TCI owned of record by the Account Party.
C. In connection with the Distribution, certain subsidiaries of
TCI have agreed to transfer to subsidiaries of the Company an aggregate 20.86%
partnership interest in PRIMESTAR, constituting TCI's entire ownership interest
in PRIMESTAR. In that connection, the Company desires to assume all obligations
of the Account Party under the Reimbursement Agreement and to indemnify
1
<PAGE>
the Account Party for any and all losses, claims, damages, liabilities,
deficiencies, obligations, costs and expenses (collectively, "Losses") of the
Account Party relating thereto.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
SECTION 1. REIMBURSEMENT AGREEMENT.
(a) The Company hereby assumes, and hereby covenants and agrees
to satisfy and discharge in full when due, all payment obligations of the
Account Party under the Reimbursement Agreement and the Letter of Credit,
whether now existing or hereafter arising. As soon as practicable after receipt
of any demand by the Issuing Bank for payment under the Reimbursement Agreement,
or after receipt of notice of any drawing or demand for payment under the Letter
of Credit, the Account Party shall give written notice thereof (or telephonic
notice, promptly confirmed in writing) to the Company (a "Payment Notice"),
setting forth the amount of the payment due under the Reimbursement Agreement in
respect of such event (the "Payment Amount"), the date and time such payment is
due, and the section of the Reimbursement Agreement under which such payment
obligation arises. Any failure or delay by the Account Party in giving any
Payment Notice hereunder shall not excuse the Company from any obligation of the
Company to the Account Party hereunder, except to the extent that such failure
or delay actually prejudices the Company.
(b) Promptly upon receipt of any Payment Notice hereunder, the
Company shall confirm to the Account Party the Company's intention to pay the
Payment Amount in accordance with the Reimbursement Agreement. If the Company
fails to give such confirmation by (i) 5:00 p.m., New York time, on the same day
that it receives any Payment Notice, if such Payment Notice is received by 11:00
a.m., New York time, on a business day, or (ii) 5:00 p.m., New York time, on the
next business day, if such Payment Notice is received after 11:00 a.m., New York
time, or on a day that is not a business day, or if, having given such
confirmation, the Company fails to make such payment by the later of (x) the
date such payment was due under the Reimbursement Agreement and (y) the second
business day after the date of such confirmation, then the Account Party shall
have the right (but not the obligation) to pay the Payment Amount (or any
portion thereof) in accordance with the Reimbursement Agreement, and, in such
event, the Company shall reimburse the Account Party for any amounts so paid,
plus interest thereon at an annual rate equal to the rate per annum from time to
time announced in New York City by The Bank of New York as its prime lending
rate, plus 2%. The Account Party shall not otherwise make any payment under the
Reimbursement Agreement without the consent of the Company, which shall not
unreasonably be withheld or delayed.
(c) The Account Party shall not consent to any modification or
amendment of the Reimbursement Agreement without the prior written consent of
the Company, which shall not unreasonably be withheld or delayed.
2
<PAGE>
SECTION 2. INDEMNIFICATION.
(a) The Company hereby agrees to indemnify and hold
harmless, to the fullest extent permitted by law, the Account Party and its
officers, directors, employees and agents, and each person who controls any of
the foregoing persons (each, an "Indemnified Party"), from and against any and
all Losses arising out of or relating to (i) any breach by the Company of its
obligations under Section 1 hereof, or (ii) any claim, action, suit or
proceeding by the Issuing Bank or any other third party (a "Claim") in
connection with the Reimbursement Agreement or the Letter of Credit. The Company
will reimburse each such Indemnified Party for all legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any Claims as they become due, including, subject to the last
sentence of Section 2(b), below, any amounts paid in settlement of a claim.
(b) Promptly after the receipt by any Indemnified Party of
notice of any Claim that is subject to indemnification hereunder, such
Indemnified Party shall give reasonable written notice to the Company. The
Indemnified Party shall be entitled, at the sole expense and liability of the
Company, to exercise full control of the defense, compromise or settlement of
any such Claim unless the Company, within a reasonable time after the giving of
such notice by the Indemnified Party, shall (i)acknowledge in writing to the
Indemnified Party the Company's liability to the Indemnified Party for such
Claim under the terms of this Section 2, (ii) notify the Indemnified Party in
writing of the Company's intention to assume the defense thereof, and (iii)
retain legal counsel reasonably satisfactory to the Indemnified Party to conduct
the defense of such Claim. The Indemnified Party shall cooperate with the
Company in assuming the defense, compromise or settlement of any such Claim in
accordance herewith in any manner that the Company may reasonably request. If
the Company so assumes the defense of any such Claim, the Indemnified Party
shall have the right to employ separate counsel and to participate in (but not
control) the defense, compromise, or settlement thereof, but the fees and
expenses of such counsel shall be the expense of the Indemnified Party unless
(i) the Company has agreed to pay such fees and expenses, (ii) any relief other
than the payment of money damages is sought against the Indemnified Party, or
(iii) the Indemnified Party shall have been advised by its counsel that there
may be one or more legal defenses available to it that are different from or
additional to those available to the Company, and in any such case the fees and
expenses of such separate counsel shall be borne by the Company. The Company
shall not settle or compromise any such claim in which any relief other than the
payment of money damages is sought against any Indemnified Party unless the
Indemnified Party consents in writing to such compromise or settlement. No
Indemnified Party shall settle or compromise any claim for which it is entitled
to indemnification hereunder without the prior written consent of the Company,
unless the Company shall have failed, after reasonable notice thereof, to
undertake control of such Claim in the manner provided above in this Section 2.
(c) As a condition to asserting any rights under this
Section 2, each Indemnified Party must appoint TCI as its sole agent for all
matters relating to any claim hereunder.
3
<PAGE>
SECTION 3. MISCELLANEOUS.
(a) No Offset. The due payment and performance in full of the
---------
Company's obligations to the Account Party hereunder shall be without regard to
any counterclaim, right of offset or any other claim whatsoever that the Company
may now or hereafter have against the Account Party or any other person, and no
such counterclaim or offset shall be asserted by the Company in any action, suit
or proceeding instituted by the Account Party or any other Indemnified Party for
payment of the Company's obligations under this Agreement or otherwise.
(b) Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings, oral and
written, between the parties hereto with respect to the subject matter hereof.
(c) No Waiver. No waiver by either party hereto of any term or
---------
condition of this Agreement, in any one or more instances, shall operate as a
waiver of such term or condition at any other time.
(d) Notices. Except as otherwise expressly provided herein, all
-------
notices, requests, demands, waivers and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given: (i)
on the date of service if served personally on the party to whom notice is to be
given; (ii) on the day of transmission if sent via facsimile transmission to the
facsimile number given below, and telephonic confirmation of receipt is obtained
promptly after completion of transmission; (iii) on the day after sending by
Federal Express or similar overnight courier or the Express Mail service of the
United States Postal Service; or (iv) on the fifth day after mailing, if mailed
to the party to whom notice is to be given, by first class mail, registered or
certified, postage prepaid and properly addressed, to the party as follows:
If to the Account Party:
TCI UA, Inc.
c/o Telecommunications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Facsimile: (303) 488-3245
Attention: General Counsel
4
<PAGE>
If to the Company:
TCI Satellite Entertainment, Inc.
8085 South Chester, Suite 300
Englewood, Colorado 80112
Facsimile (303) 712-4977
Attention: President
with a copy to the Company's Corporate Counsel at the same address.
A party may change its address for the purposes of this Agreement
by giving the other party written notice of its new address in the manner set
forth above. Notice of change of address shall be effective upon receipt
thereof.
(e) Amendment. This Agreement may not be amended or modified in
---------
any respect except by a written agreement signed by the parties hereto.
(f) Successors and Assigns; No Third-Party Beneficiaries. This
-----------------------------------------------------
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns. Nothing contained in this
Agreement is intended to confer upon any other persons other than the parties
hereto or their respective successors and permitted assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement, other
than rights conferred upon Indemnified Parties under Section 2.
(g) Governing Law. This Agreement and the legal relations
-------------
between the parties hereto shall be governed by and construed in accordance with
the laws of the State of Colorado, without giving effect to conflicts of laws.
(h) Severability. If any provision of this Agreement shall be
------------
invalid or unenforceable, such invalidity or unenforceability shall not render
the entire Agreement invalid. Rather, the Agreement shall be construed as if not
containing the particular invalid or unenforceable provisions, and the rights
and obligations of each party shall be construed and enforced accordingly.
(i) No Joint Venture. Nothing contained herein shall constitute
----------------
either party an employee, agent or partner of, or joint venturer with, the other
party.
(j) Headings. The section headings contained in this Agreement
--------
are inserted for reference purposes only and shall not effect the meaning or
interpretation of this Agreement.
(k) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(l) Subordination. Each of TCI and the Company, for itself, its
-------------
successors and assigns, covenants and agrees that all payment obligations of the
Company to TCI hereunder are and shall be subordinated in right of payment to
the prior payment in full of all indebtedness of the Company, whether now
existing or hereafter arising, to any financial institution (a "Senior Lender")
to which the Company may from time to time be indebted for borrowed money,
including principal, accrued interest and any other amounts with respect thereto
(the "Senior Debt"). In that connection, TCI hereby agrees to execute and
deliver any and all agreements regarding the subordination of the Company's
payment obligations hereunder to the Senior Debt as may from time to time be
reasonably requested by the Senior Lender.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed as of the day and year first above written.
TCI UA 1, INC.
By: _____________________________
Name:
Title:
TCI SATELLITE ENTERTAINMENT, INC.
By: _____________________________
Name:
Title:
6
<PAGE>
EXHIBIT 10.18
[FORM OF]
INDEMNIFICATION AGREEMENT
-------------------------
Indemnification Agreement (this "Agreement"), dated as of
____________, 1996, between TCI Satellite Entertainment, Inc., a Delaware
corporation (the "Company") and TCI Communications Inc., a Delaware corporation
(the "Account Party").
RECITALS
A. Tele-Communications, Inc. ("TCI") owns all the issued and
outstanding capital stock of the Company (the "Company Stock"). TCI intends to
distribute (the "Distribution") the Company Stock to the holders of its Tele-
Communications, Inc. Series A TCI Group Common Stock and Tele-Communications,
Inc. Series B TCI Group Common Stock. As a result of the Distribution, the
Company will cease to be a subsidiary of TCI, and TCI and the Company will be
separate public companies.
B. The Account Party is a wholly owned subsidiary of TCI. The
Account Party, through indirect subsidiaries, TCI K-1, Inc. ("TCI K-1") and
United Artists K-1 Investments, Inc.("UA K-1"), has arranged for the issuance by
the Bank of New York (the "Issuing Bank") of an Irrevocable Transferable Letter
of Credit No. S-00035000, dated October 18, 1996, in the amount of $25,000,000
(the "Letter of Credit"). The beneficiary of the Letter of Credit is G.E.
American Communications, Inc. The Letter of Credit was issued pursuant to an
Addendum Regarding Letters of Credit dated as of October 18, 1996 (the
"Addendum") among PRIMESTAR Partners, L.P. ("PRIMESTAR"), G.E. American
Communications, Inc. and the other parties thereto and provides collateral
security for certain obligations of PRIMESTAR to the beneficiary. The Account
Party is obligated to reimburse the Issuing Bank for any drawings made under the
Letter of Credit pursuant to a reimbursement agreement and/or other
documentation between the Account Party and the Issuing Bank (collectively, the
"Reimbursement Agreement").
C. In connection with the Distribution, TCI K-1 and UA K-1 have
agreed to transfer to subsidiaries of the Company their aggregate 20.86%
partnership interest in PRIMESTAR, constituting TCI's entire ownership interest
in PRIMESTAR. In that connection, the Company desires to assume all obligations
of the Account Party under the Reimbursement Agreement and to indemnify
1
<PAGE>
the Account Party for any and all losses, claims, damages, liabilities,
deficiencies, obligations, costs and expenses (collectively, "Losses") of the
Account Party relating thereto.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
SECTION 1. REIMBURSEMENT AGREEMENT.
(a) The Company hereby assumes, and hereby covenants and agrees
to satisfy and discharge in full when due, all payment obligations of the
Account Party under the Reimbursement Agreement and the Letter of Credit,
whether now existing or hereafter arising. As soon as practicable after receipt
of any demand by the Issuing Bank for payment under the Reimbursement Agreement,
or after receipt of notice of any drawing or demand for payment under the Letter
of Credit, the Account Party shall give written notice thereof (or telephonic
notice, promptly confirmed in writing) to the Company (a "Payment Notice"),
setting forth the amount of the payment due under the Reimbursement Agreement in
respect of such event (the "Payment Amount"), the date and time such payment is
due, and the applicable provisions of the Reimbursement Agreement under which
such payment obligation arises. Any failure or delay by the Account Party in
giving any Payment Notice hereunder shall not excuse the Company from any
obligation of the Company to the Account Party hereunder, except to the extent
that such failure or delay actually prejudices the Company.
(b) Promptly upon receipt of any Payment Notice hereunder, the
Company shall confirm to the Account Party the Company's intention to pay the
Payment Amount in accordance with the Reimbursement Agreement. If the Company
fails to give such confirmation by (i) 5:00 p.m., New York time, on the same day
that it receives any Payment Notice, if such Payment Notice is received by 11:00
a.m., New York time, on a business day, or (ii) 5:00 p.m., New York time, on the
next business day, if such Payment Notice is received after 11:00 a.m., New York
time, or on a day that is not a business day, or if, having given such
confirmation, the Company fails to make such payment by the later of (x) the
date such payment was due under the Reimbursement Agreement and (y) the second
business day after the date of such confirmation, then the Account Party shall
have the right (but not the obligation) to pay the Payment Amount (or any
portion thereof) in accordance with the Reimbursement Agreement, and, in such
event, the Company shall reimburse the Account Party for any amounts so paid,
plus interest thereon at an annual rate equal to the rate per annum from time to
time announced in New York City by The Bank of New York as its prime lending
rate, plus 2%. The Account Party shall not otherwise make any payment under the
Reimbursement Agreement without the consent of the Company, which shall not
unreasonably be withheld or delayed.
(c) The Account Party shall not consent to any modification or
amendment of the Reimbursement Agreement without the prior written consent of
the Company, which shall not unreasonably be withheld or delayed.
2
<PAGE>
SECTION 2. INDEMNIFICATION.
(a) The Company hereby agrees to indemnify and hold
harmless, to the fullest extent permitted by law, the Account Party and its
officers, directors, employees and agents, and each person who controls any of
the foregoing persons (each, an "Indemnified Party"), from and against any and
all Losses arising out of or relating to (i) any breach by the Company of its
obligations under Section 1 hereof, or (ii) any claim, action, suit or
proceeding by the Issuing Bank or any other third party (a "Claim") in
connection with the Reimbursement Agreement or the Letter of Credit. The Company
will reimburse each such Indemnified Party for all legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any Claims as they become due, including, subject to the last
sentence of Section 2(b), below, any amounts paid in settlement of a claim.
(b) Promptly after the receipt by any Indemnified Party of
notice of any Claim that is subject to indemnification hereunder, such
Indemnified Party shall give reasonable written notice to the Company. The
Indemnified Party shall be entitled, at the sole expense and liability of the
Company, to exercise full control of the defense, compromise or settlement of
any such Claim unless the Company, within a reasonable time after the giving of
such notice by the Indemnified Party, shall (i)acknowledge in writing to the
Indemnified Party the Company's liability to the Indemnified Party for such
Claim under the terms of this Section 2, (ii) notify the Indemnified Party in
writing of the Company's intention to assume the defense thereof, and (iii)
retain legal counsel reasonably satisfactory to the Indemnified Party to conduct
the defense of such Claim. The Indemnified Party shall cooperate with the
Company in assuming the defense, compromise or settlement of any such Claim in
accordance herewith in any manner that the Company may reasonably request. If
the Company so assumes the defense of any such Claim, the Indemnified Party
shall have the right to employ separate counsel and to participate in (but not
control) the defense, compromise, or settlement thereof, but the fees and
expenses of such counsel shall be the expense of the Indemnified Party unless
(i) the Company has agreed to pay such fees and expenses, (ii) any relief other
than the payment of money damages is sought against the Indemnified Party, or
(iii) the Indemnified Party shall have been advised by its counsel that there
may be one or more legal defenses available to it that are different from or
additional to those available to the Company, and in any such case the fees and
expenses of such separate counsel shall be borne by the Company. The Company
shall not settle or compromise any such claim in which any relief other than the
payment of money damages is sought against any Indemnified Party unless the
Indemnified Party consents in writing to such compromise or settlement. No
Indemnified Party shall settle or compromise any claim for which it is entitled
to indemnification hereunder without the prior written consent of the Company,
unless the Company shall have failed, after reasonable notice thereof, to
undertake control of such Claim in the manner provided above in this Section 2.
(c) As a condition to asserting any rights under this
Section 2, each Indemnified Party must appoint TCI as its sole agent for all
matters relating to any claim hereunder.
3
<PAGE>
SECTION 3. MISCELLANEOUS.
(a) No Offset. The due payment and performance in full of the
---------
Company's obligations to the Account Party hereunder shall be without regard to
any counterclaim, right of offset or any other claim whatsoever that the Company
may now or hereafter have against the Account Party or any other person, and no
such counterclaim or offset shall be asserted by the Company in any action, suit
or proceeding instituted by the Account Party or any other Indemnified Party for
payment of the Company's obligations under this Agreement or otherwise.
(b) Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior negotiations, agreements and understandings, oral and
written, between the parties hereto with respect to the subject matter hereof.
(c) No Waiver. No waiver by either party hereto of any term or
---------
condition of this Agreement, in any one or more instances, shall operate as a
waiver of such term or condition at any other time.
(d) Notices. Except as otherwise expressly provided herein, all
-------
notices, requests, demands, waivers and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given: (i)
on the date of service if served personally on the party to whom notice is to be
given; (ii) on the day of transmission if sent via facsimile transmission to the
facsimile number given below, and telephonic confirmation of receipt is obtained
promptly after completion of transmission; (iii) on the day after sending by
Federal Express or similar overnight courier or the Express Mail service of the
United States Postal Service; or (iv) on the fifth day after mailing, if mailed
to the party to whom notice is to be given, by first class mail, registered or
certified, postage prepaid and properly addressed, to the party as follows:
If to the Account Party:
TCI Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Facsimile: (303) 488-3245
Attention: General Counsel
4
<PAGE>
If to the Company:
TCI Satellite Entertainment, Inc.
8085 South Chester, Suite 300
Englewood, Colorado 80112
Facsimile (303) 712-4977
Attention: President
with a copy to the Company's Corporate Counsel at the same address.
A party may change its address for the purposes of this Agreement
by giving the other party written notice of its new address in the manner set
forth above. Notice of change of address shall be effective upon receipt
thereof.
(e) Amendment. This Agreement may not be amended or modified in
---------
any respect except by a written agreement signed by the parties hereto.
(f) Successors and Assigns; No Third-Party Beneficiaries. This
-----------------------------------------------------
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns. Nothing contained in this
Agreement is intended to confer upon any other persons other than the parties
hereto or their respective successors and permitted assigns any rights,
remedies, obligations or liabilities under or by reason of this Agreement, other
than rights conferred upon Indemnified Parties under Section 2.
(g) Governing Law. This Agreement and the legal relations
-------------
between the parties hereto shall be governed by and construed in accordance with
the laws of the State of Colorado, without giving effect to conflicts of laws.
(h) Severability. If any provision of this Agreement shall be
------------
invalid or unenforceable, such invalidity or unenforceability shall not render
the entire Agreement invalid. Rather, the Agreement shall be construed as if not
containing the particular invalid or unenforceable provisions, and the rights
and obligations of each party shall be construed and enforced accordingly.
(i) No Joint Venture. Nothing contained herein shall constitute
----------------
either party an employee, agent or partner of, or joint venturer with, the other
party.
(j) Headings. The section headings contained in this Agreement
--------
are inserted for reference purposes only and shall not effect the meaning or
interpretation of this Agreement.
(k) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(l) Subordination. Each of TCI and the Company, for itself, its
-------------
successors and assigns, covenants and agrees that all payment obligations of the
Company to TCI hereunder are and shall be subordinated in right of payment to
the prior payment in full of all indebtedness of the Company, whether now
existing or hereafter arising, to any financial institution (a "Senior Lender")
to which the Company may from time to time be indebted for borrowed money,
including principal, accrued interest and any other amounts with respect thereto
(the "Senior Debt"). In that connection, TCI hereby agrees to execute and
deliver any and all agreements regarding the subordination of the Company's
payment obligations hereunder to the Senior Debt as may from time to time be
reasonably requested by the Senior Lender.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed as of the day and year first above written.
TCI COMMUNICATIONS, INC.
By: _____________________________
Name:
Title:
TCI SATELLITE ENTERTAINMENT, INC.
By: _____________________________
Name:
Title:
6
<PAGE>
Exhibit 10.3
TCI SATELLITE ENTERTAINMENT, INC.
1996 STOCK INCENTIVE PLAN
Article I
Purpose and Effectiveness
1.1 Purpose. The purpose of the TCI Satellite Entertainment, Inc. 1996
Stock Incentive Plan (the "Plan") is to promote the success of TCI Satellite
Entertainment, Inc. (the "Company") by providing a method whereby (i) eligible
employees of the Company and its Subsidiaries and (ii) eligible non-employee
consultants and advisors to the Company and its Subsidiaries may be awarded
additional remuneration for services rendered and encouraged to invest in
capital stock of the Company, thereby increasing their proprietary interest in
the Company's businesses, encouraging them to remain in the employ of the
Company or its Subsidiaries, and increasing their personal interest in the
continued success and progress of the Company or its Subsidiaries. The Plan is
also intended to aid in attracting persons of exceptional ability (i) to become
officers and employees of the Company and its Subsidiaries or (ii) to provide
services to the Company as non-employee consultants and advisors.
1.2 Effective Date. The Plan shall be effective as of the date it is
approved by both the Board of Directors of the Company and the sole stockholder
of the Company.
Article II
Definitions
2.1 Certain Defined Terms. Capitalized terms not defined elsewhere in the
Plan shall have the following meanings (whether used in the singular or plural):
"Affiliate" of the Company means any corporation, partnership, or
other business association that, directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with the Company.
"Agreement" means a stock option agreement, stock appreciation rights
agreement, restricted shares agreement, stock units agreement, performance
award agreement or agreement evidencing more than one type of Award, as
specified in Section 11.5, as any such Agreement may be supplemented or
amended from time to time.
"Approved Transaction" means any transaction in which the Board (or,
if approval of the Board is not required as a matter of law, the
stockholders of the
<PAGE>
Company) shall approve (i) any consolidation or merger of the Company, or
binding share exchange, pursuant to which shares of Common Stock would be
changed or converted into or exchanged for cash, securities or other
property, other than any such transaction in which the holders of the
Common Stock immediately prior to such transaction have the same
proportionate ownership of the common stock of, and voting power with
respect to, the surviving corporation immediately after such transaction,
(ii) any merger, consolidation or binding share exchange to which the
Company is a party as a result of which the persons who are holders of the
Common Stock immediately prior thereto have less than a majority of the
combined voting power of the outstanding capital stock of the Company
ordinarily (and apart from the rights accruing under special circumstances)
having the right to vote in the election of directors immediately following
such merger, consolidation or binding share exchange, (iii) the adoption of
any plan or proposal for the liquidation or dissolution of the Company, or
(iv) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, of the assets
of the Company.
"Award" means a Performance Award and/or a grant of Options, SARs,
Restricted Shares and/or Stock Units under this Plan.
"Board" means the Board of Directors of the Company.
"Board Change" means, during any period of two consecutive years,
individuals who at the beginning of such period constituted the entire
Board cease for any reason to constitute a majority thereof unless the
election, or the nomination for election, of each new director was approved
by a vote of at least two-thirds of the directors then still in office who
were directors at the beginning of the period.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor statute or statutes thereto. Reference to any
specific Code section shall include any successor section.
"Committee" means the committee of the Board appointed pursuant to
Section 3.1 to administer the Plan.
"Common Stock" means the Series A Stock and the Series B Stock.
"Company" has the meaning ascribed to such term in Section 1.1.
"Control Purchase" means any transaction (or series of related
transactions) in which (i) any person (as such term is defined in Sections
13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity
(other than the Company, any Subsidiary or any employee benefit plan
sponsored by the Company or any
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<PAGE>
Subsidiary, or any Controlling Person (as defined below)) shall purchase
any common stock of the Company (or securities convertible into common
stock of the Company) for cash, securities or any other consideration
pursuant to a tender offer or exchange offer, without the prior consent of
the Board, or (ii) any person (as so defined), corporation or other entity
(other than the Company, any Subsidiary, any employee benefit plan
sponsored by the Company or any Subsidiary, or any Controlling Person)
shall become the "beneficial owner" (as such term is defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing 20% or more of the combined voting power of the then
outstanding securities of the Company ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the
election of directors (calculated as provided in Rule 13d-3(d) under the
Exchange Act in the case of rights to acquire the Company's securities),
other than in a transaction (or series of related transactions) approved by
the Board. For purposes of this definition, "Controlling Person" means each
of (a) the Chairman of the Board, the President and each of the directors
of the Company as of the Effective Date of this Plan, (b) John C. Malone,
(c) Bob Magness, (d) the respective family members, estates and heirs of
each of the persons referred to in clauses (a) through (c) above and any
trust or other investment vehicle for the primary benefit of any of such
persons or their respective family members or heirs and (e) Kearns-Tribune
Corporation, a Delaware corporation. As used with respect to any person,
the term "family member" means the spouse, siblings and lineal descendants
of such person.
"Disability" means the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment that (a) can be expected to result in death or (b) has lasted or
can be expected to last for a continuous period of not less than 12 months.
"Dividend Equivalents" means, with respect to Restricted Shares to be
issued at the end of the Restriction Period, to the extent specified by the
Committee only, an amount equal to all dividends and other distributions
(or the economic equivalent thereof) that are payable to stockholders of
record during the Restriction Period on a like number of shares of Series A
Stock.
"Domestic Relations Order" means a domestic relations order as defined
by the Code or Title I of the Employee Retirement Income Security Act, or
the rules thereunder.
"Effective Date" means the date on which the Plan became effective
pursuant to Section 1.2.
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<PAGE>
"Equity security" has the meaning ascribed to such term in Section
3(a)(11) of the Exchange Act, and an equity security of an issuer has the
meaning ascribed thereto in Rule 16a-1 promulgated under the Exchange Act,
or any successor Rule.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor statute or statutes thereto. Reference
to any specific Exchange Act section shall include any successor section.
"Fair Market Value" of a share of Series A Stock or Series B Stock on
any day means the last sale price (or, if no last sale price is reported,
the average of the high bid and low asked prices) for a share of Series A
Stock or Series B Stock, as applicable, on such day (or, if such day is not
a trading day, on the next preceding trading day) as reported on NASDAQ or,
if not reported on NASDAQ, as quoted by the National Quotation Bureau
Incorporated, or if the Series A Stock or Series B Stock is listed on an
exchange, on the principal exchange on which the Series A Stock or Series B
Stock, as applicable, is listed. If for any day the Fair Market Value of a
share of Series A Stock or Series B Stock, as applicable, is not
determinable by any of the foregoing means, then the Fair Market Value for
such day shall be determined in good faith by the Committee on the basis of
such quotations and other considerations as the Committee deems
appropriate.
"Free Standing SAR" has the meaning ascribed thereto in Section 7.1.
"Holder" means an employee or former employee of the Company or a
Subsidiary, or a present or former consultant or advisor to the Company or
a Subsidiary, who has in either case received an Award under this
Plan.
"Incentive Stock Option" means a stock option granted under Article VI
which is intended to be an incentive stock option within the meaning of
Section 422 of the Code.
"NASDAQ" means the Nasdaq Stock Market.
"Nonqualified Stock Option" means a stock option granted under Article
VI that is designated a nonqualified stock option, or is otherwise not an
Incentive Stock Option.
"Option" means any Incentive Stock Option or Nonqualified Stock
Option.
"Plan" has the meaning ascribed thereto in Section 1.1.
"Performance Award" means an award made pursuant to Article X that is
subject to the attainment of one or more Performance Goals.
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<PAGE>
"Performance Goal" means a standard established by the Committee to
determine in whole or in part whether a Performance Award shall be earned.
"Restricted Shares" means shares of Series A Stock or the right to
receive shares of Series A Stock, as the case may be, awarded pursuant to
Article VIII.
"Restriction Period" means a period of time beginning on the date of
each award of Restricted Shares and ending on the Vesting Date with respect
to such award.
"Retained Distribution" has the meaning ascribed thereto in Section
8.3.
"SARs" means stock appreciation rights, awarded pursuant to Article
VII, with respect to shares of Series A Stock.
"Series A Stock" means the Series A Common Stock, $1.00 par value per
share, of the Company.
"Series B Stock" means the Series B Common Stock, $1.00 par value per
share, of the Company.
"Stock Unit Award" has the meaning ascribed thereto in Section 9.1.
"Subsidiary" of the Company means any present or future subsidiary (as
defined in Section 424(f) of the Code) of the Company, or any business
entity in which the Company owns, directly or indirectly, 50% or more of
the voting, capital or profits interests. An entity shall be deemed a
subsidiary of the Company for purposes of this definition only for such
periods as the requisite ownership or control relationship is maintained.
"Tandem SARs" has the meaning ascribed thereto in Section 7.1.
"Vesting Date" with respect to any Restricted Shares awarded hereunder
means the date on which such Restricted Shares cease to be subject to a
risk of forfeiture, as designated in or determined in accordance with the
Agreement with respect to such award of Restricted Shares pursuant to
Article VIII. If more than one Vesting Date is designated for an award of
Restricted Shares, reference in the Plan to a Vesting Date in respect of
such Award shall be deemed to refer to each part of such Award and the
Vesting Date for such part.
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<PAGE>
Article III
Administration
3.1 Committee. The Plan shall be administered by the Compensation Committee
of the Board unless a different committee is appointed by the Board. The
Committee shall be comprised of not less than two persons. Each member of the
Committee shall be a member of the Board who (i) is not a current employee of
the Company, and (ii) is not otherwise disqualified from being (A) a "non-
employee director" with respect to the Company for purposes of Rule 16b-3 under
the Exchange Act (or any successor rule), or (B) an "outside director" with
respect to the Company for purposes of Section 162(m) of the Code (or any
successor statute) and the rules and regulations of the Treasury Department
promulgated thereunder. Subject to the foregoing, the Board may from time to
time appoint members of the Committee in substitution for or in addition to
members previously appointed, may fill vacancies in the Committee and may remove
members of the Committee. The Committee shall select one of its members as its
chairman and shall hold its meetings at such times and places as it shall deem
advisable. A majority of its members shall constitute a quorum and all
determinations shall be made by a majority of such quorum. Any determination
reduced to writing and signed by all of the members shall be fully as effective
as if it had been made by a majority vote at a meeting duly called and
held.
3.2 Powers. The Committee shall have full power and authority to grant to
eligible persons Options under Article VI of the Plan, SARs under Article VII of
the Plan, Restricted Shares under Article VIII of the Plan, Stock Units under
Article IX of the Plan, and/or Performance Awards under Article X of the Plan,
to determine the terms and conditions (which need not be identical) of all
Awards so granted, to interpret the provisions of the Plan and any Agreements
relating to Awards granted under the Plan and to supervise the administration of
the Plan. The Committee in making an Award may provide for the granting or
issuance of additional, replacement or alternative Awards upon the occurrence of
specified events, including the exercise of the original Award. The Committee
shall have sole authority in to select persons to whom Awards may be granted
under the Plan and to determine the timing, pricing and amount of any such
Award, subject only to the express provisions of the Plan. In making
determinations hereunder, the Committee may take into account the nature of the
services rendered by the respective employees, consultants and advisors, their
present and potential contributions to the success of the Company and its
Subsidiaries and such other factors as the Committee in its discretion deems
relevant.
3.3 Interpretation. The Committee is authorized, subject to the provisions
of the Plan, to establish, amend and rescind such rules and regulations as it
deems necessary or advisable for the proper administration of the Plan and to
take such other action in connection with or in relation to the Plan as it deems
necessary or advisable. Each action and determination made or taken pursuant to
the Plan by the Committee, including any interpretation or construction of the
Plan, shall be final and conclusive for all purposes and upon all persons. No
member of the Committee shall be liable
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<PAGE>
for any action or determination made or taken by him or the Committee in good
faith with respect to the Plan.
Article IV
Shares Subject to the Plan
4.1 Number of Shares. Subject to the provisions of this Article IV, the
maximum number of shares of Series A Stock with respect to which Awards may be
granted during the term of the Plan shall be 3,200,000 shares. No shares of
Series B Stock may be the subject of Awards under the Plan. Shares of Series A
Stock will be made available from the authorized but unissued shares of the
Company or from shares reacquired by the Company, including shares purchased in
the open market. The shares of Series A Stock subject to (i) any Award granted
under the Plan that shall expire, terminate or be annulled for any reason
without having been exercised (or considered to have been exercised as provided
in Section 7.2), (ii) any Award of any SARs granted under the Plan that shall be
exercised for cash and (iii) any Award of Restricted Shares or Stock Units that
shall be forfeited prior to becoming vested (provided that the Holder received
no benefits of ownership of such Restricted Shares or Stock Units other than
voting rights and the accumulation of Retained Distributions and unpaid Dividend
Equivalents that are likewise forfeited), shall again be available for purposes
of the Plan.
4.2 Adjustments. If the Company subdivides its outstanding shares of Series
A Stock into a greater number of shares of Series A Stock (by stock dividend,
stock split, reclassification or otherwise) or combines its outstanding shares
of Series A Stock into a smaller number of shares of Series A Stock (by reverse
stock split, reclassification or otherwise), or if the Committee determines that
any stock dividend, extraordinary cash dividend, reclassification,
recapitalization, reorganization, split-up, split-off, spin-off, combination,
exchange of shares, warrants or rights offering to purchase Series A Stock, or
other similar corporate event (including mergers or consolidations other than
those which constitute Approved Transactions) affects the Series A Stock such
that an adjustment is required in order to preserve the benefits or potential
benefits intended to be made available under this Plan, then the Committee
shall, in its sole discretion and in such manner as the Committee may deem
equitable and appropriate, make such adjustments to any or all of (i) the number
and kind of shares which thereafter may be awarded, optioned, or otherwise made
subject to the benefits contemplated by the Plan, (ii) the number and kind of
shares subject to outstanding Awards, and (iii) the purchase or exercise price
and the relevant appreciation base with respect to any of the foregoing,
provided, however, that the number of shares subject to any Award shall always
be a whole number. The Committee may, if deemed appropriate, provide for a cash
payment to any Holder of an Award in connection with any adjustment made
pursuant to this Section 4.2.
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<PAGE>
Article V
Eligibility
5.1 General. The persons who shall be eligible to participate in the Plan
and to receive Awards under the Plan shall be such employees (including officers
and, subject to Section 5.2, directors) of the Company and its Subsidiaries or
consultants or advisors to the Company and its Subsidiaries as the Committee
shall select. Awards may be made to employees, consultants and advisors who hold
or have held Awards under this Plan or hold or have held awards under any other
plan of the Company or any of its Affiliates.
5.2 Ineligibility. No member of the Committee, while serving as such, shall
be eligible to receive an Award.
Article VI
Stock Options
6.1 Grant of Options. Subject to the limitations of the Plan, the Committee
shall designate from time to time those eligible persons to be granted Options,
the time when each Option shall be granted to such eligible persons, the number
of shares subject to such Option, whether such Option is an Incentive Stock
Option or a Nonqualified Stock Option and, subject to Section 6.2, the purchase
price of the shares of Series A Stock subject to such Option. Subject to the
other provisions of the Plan, the same person may receive Incentive Stock
Options and Nonqualified Stock Options at the same time and pursuant to the same
Agreement, provided that Incentive Stock Options and Nonqualified Stock Options
are clearly designated as such.
6.2 Option Price. The price at which shares may be purchased upon exercise
of an Option shall be fixed by the Committee and may be more than, less than or
equal to the Fair Market Value of the Series A Stock as of the date the Option
is granted.
6.3 Limitation on Grants. Except for grants of Awards described in Section
11.1, no Person may be granted Options covering more than 1,000,000 shares of
Series A Stock in the calendar year ending December 31, 1996, or Options
covering more than 500,000 shares of Series A Stock in any one subsequent
calendar year (in each case as adjusted as provided in Section 4.2).
6.4 Term of Options. Subject to the provisions of the Plan with respect to
death, retirement and termination of employment, the term of each Option shall
be for such period as the Committee shall determine as set forth in the
applicable Agreement.
6.5 Exercise of Options. An Option granted under the Plan shall become (and
remain) exercisable during the term of the Option to the extent provided in the
applicable Agreement and this Plan and, unless the Agreement otherwise provides,
may be exercised to the extent exercisable, in
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<PAGE>
whole or in part, at any time and from time to time during such term; provided.
however, that subsequent to the grant of an Option, the Committee, at any time
before complete termination of such Option, may accelerate the time or times at
which such Option may be exercised in whole or in part (without reducing the
term of such Option).
6.6 Manner of Exercise.
(a) Form of Payment. An Option shall be exercised by written notice to
the Company upon such terms and conditions as the Agreement may provide and
in accordance with such other procedures for the exercise of Options as the
Committee may establish from time to time. The method or methods of payment
of the purchase price for the shares to be purchased upon exercise of an
Option and of any amounts required by Section 11.10 shall be determined by
the Committee and may consist of (i) cash, (ii) check, (iii) promissory
note, (iv) whole shares of Series A Stock or Series B Stock already owned
by the Holder, (v) the withholding of shares of Series A Stock issuable
upon such exercise of the Option, (vi) the delivery, together with a
properly executed exercise notice, of irrevocable instructions to a broker
to deliver promptly to the Company the amount of sale or loan proceeds
required to pay the purchase price, (vii) any combination of the foregoing
methods of payment, or (viii) such other consideration and method of
payment as may be permitted for the issuance of shares under the Delaware
General Corporation Law. The permitted method or methods of payment of the
amounts payable upon exercise of an Option, if other than in cash, shall be
set forth in the applicable Agreement and may be subject to such conditions
as the Committee deems appropriate. Without limiting the generality of the
foregoing, if a Holder is permitted to elect to have shares of Series A
Stock issuable upon exercise of an Option withheld to pay all or any part
of the amounts payable in connection with such exercise, then the Committee
may reserve the discretion to approve or disapprove such election.
(b) Value of Shares. Shares of Series A Stock or Series B Stock
delivered in payment of all or any part of the amounts payable in
connection with the exercise of an Option, and shares of Series A Stock
withheld for such payment, shall be valued for such purpose at their Fair
Market Value as of the exercise date.
(c) Issuance of Shares. The Company shall effect the transfer of the
shares of Series A Stock purchased under any Option as soon as practicable
after the exercise thereof and payment in full of the purchase price
therefor and of any amounts required by Section 11.10, and within a
reasonable time thereafter such transfer shall be evidenced on the books of
the Company. No Holder or other person exercising an Option shall have any
of the rights of a stockholder of the Company with respect to shares of
Series A Stock subject to an Option granted under the Plan until due
exercise and full payment has been made. No adjustment shall be made for
cash dividends or other rights for which the record date is prior to the
date of such due exercise and full payment.
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6.7 Nontransferability. Unless otherwise determined by the Committee
and provided in the applicable Agreement, Options shall not be transferable
other than by will or the laws of descent and distribution or pursuant to a
Domestic Relations Order and, except as otherwise required pursuant to a
Domestic Relations Order, Options may be exercised during the lifetime of
the Holder thereof only by such Holder (or his or her court appointed legal
representative).
Article VII
SARs
7.1 Grant of SARs. Subject to the limitations of the Plan, SARs may be
granted by the Committee to such eligible persons in such numbers and at
such times during the term of the Plan as the Committee shall determine. An
SAR may be granted to a Holder of an Option (hereinafter called a "related
Option") with respect to all or a portion of the shares of Series A Stock
subject to the related Option (a "Tandem SAR") or may be granted separately
to an eligible employee (a "Free Standing SAR"). Subject to the limitations
of the Plan, SARs shall be exercisable in whole or in part upon notice to
the Company upon such terms and conditions as are provided in the
Agreement. Except for grants of Awards described in Section 11.1, no Person
may be granted SARs covering more than 1,000,000 shares of Series A Stock
in the calendar year ending December 31, 1996, or SARs covering more than
500,000 shares of Series A Stock in any one subsequent calendar year (in
each case as adjusted as provided in Section 4.2).
7.2 Tandem SARs. A Tandem SAR may be granted either concurrently with
the grant of the related Option or (if the related Option is a Nonqualified
Option) at any time thereafter prior to the complete exercise, termination,
expiration or cancellation of such related Option. Tandem SARs shall be
exercisable only at the time and to the extent that the related Option is
exercisable (and may be subject to such additional limitations on
exercisability as the Agreement may provide), and in no event after the
complete termination or full exercise of the related Option. Upon the
exercise or termination of the related Option, the Tandem SARs with respect
thereto shall be canceled automatically to the extent of the number of
shares of Series A Stock with respect to which the related Option was so
exercised or terminated. Subject to the limitations of the Plan, upon the
exercise of a Tandem SAR, the Holder thereof shall be entitled to receive
from the Company, for each share of Series A Stock with respect to which
the Tandem SAR is being exercised, consideration (in the form determined as
provided in Section 7.4) equal in value to the excess of the Fair Market
Value of a share of Series A Stock on the date of exercise over the related
Option purchase price per share; provided, however, that the Committee may,
in any Agreement granting Tandem SARs, provide that the appreciation
realizable upon exercise thereof shall be measured from a base higher than
the related Option purchase price.
7.3 Free Standing SARs. Free Standing SARs shall be exercisable at the
time, to the extent and upon the terms and conditions set forth in the
applicable Agreement. The base price of a Free Standing SAR shall be not
less than 100% of the Fair Market Value of the Series A Stock on the date
of grant of the Free Standing SAR. Subject to the limitations of the Plan,
upon the exercise
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of a Free Standing SAR, the Holder thereof shall be entitled to receive
from the Company, for each share of Series A Stock with respect to which
the Free Standing SAR is being exercised, consideration (in the form
determined as provided in Section 7.4) equal in value to the excess of the
Fair Market Value of a share of Series A Stock on the date of exercise over
the base price per share of such Free Standing SAR.
7.4 Consideration. The consideration to be received upon the exercise
of an SAR by the Holder shall be paid in cash, shares of Series A Stock
(valued at Fair Market Value on the date of exercise of such SAR) or a
combination of cash and shares of Series A Stock as specified in the
Agreement, or, if so provided in the Agreement, either as determined by the
Committee in its sole discretion or as elected by the Holder, provided that
the Committee shall have the sole discretion to approve or disapprove the
election by a Holder to receive cash in full or partial settlement of an
SAR, which approval or disapproval may be given at any time. The Company's
obligation arising upon the exercise of an SAR may be paid currently or on
a deferred basis with such interest or earnings equivalent as the Committee
may determine. No fractional shares of Series A Stock shall be issuable
upon exercise of an SAR and, unless otherwise provided in the applicable
Agreement, the Holder will receive cash in lieu of fractional shares.
Unless the Committee shall otherwise determine, to the extent a Free
Standing SAR is exercisable, it will be exercised automatically for cash on
its expiration date.
7.5 Limitations. The applicable Agreement may provide for a limit on
the amount payable to a Holder upon exercise of SARs at any time or in the
aggregate, for a limit on the number of SARs that may be exercised by the
Holder in whole or in part for cash during any specified period, for a
limit on the time periods during which a Holder may exercise SARs and for
such other limits on the rights of the Holder and such other terms and
conditions of the SAR as the Committee may determine, including, without
limitation, a condition that the SAR may be exercised only in accordance
with rules and regulations adopted by the Committee from time to time.
Unless otherwise so provided in the applicable Agreement, any such limit
relating to a Tandem SAR shall not restrict the exercisability of the
related Option. Such rules and regulations may govern the right to exercise
SARs granted prior to the adoption or amendment of such rules and
regulations as well as SARs granted thereafter.
7.6 Exercise. For purposes of this Article VII, the date of exercise
of an SAR shall mean the date on which the Company shall have received
notice from the Holder of the SAR of the exercise of such SAR.
7.7 Nontransferability. Unless otherwise determined by the Committee
and provided in the applicable Agreement, SARs shall not be transferable
other than by will or the laws of descent and distribution or pursuant to a
Domestic Relations Order and, except as otherwise required pursuant to a
Domestic Relations Order, SARs may be exercised during the lifetime of the
Holder thereof only by such Holder (or his or her court appointed legal
representative).
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Article VIII
Restricted Shares
8.1 Grant. Subject to the limitations of the Plan, the Committee shall
designate those eligible persons to be granted awards of Restricted Shares,
shall determine the time when each such Award shall be granted, whether
shares of Series A Stock covered by awards of Restricted Shares will be
issued at the beginning or the end of the Restriction Period and whether
Dividend Equivalents will be paid during the Restriction Period in the
event shares of the Series A Stock are to be issued at the end of the
Restriction Period, and shall designate (or set forth the basis for
determining) the Vesting Date or Vesting Dates for each award of Restricted
Shares and may prescribe other restrictions, terms and conditions
applicable to the vesting of such Restricted Shares in addition to those
provided in the Plan. The Committee shall determine the price, if any, to
be paid by the Holder for the Restricted Shares; provided, however, that
the issuance of Restricted Shares shall be made for at least the minimum
consideration necessary to permit such Restricted Shares to be deemed fully
paid and nonassessable. All determinations made by the Committee pursuant
to this Section 8.1 shall be specified in the Agreement.
8.2 Issuance of Restricted Shares at Beginning of the Restriction
Period. If shares of Series A Stock are issued at the beginning of the
Restriction Period, the stock certificate or certificates representing such
Restricted Shares shall be registered in the name of the Holder to whom
such Restricted Shares shall have been awarded. During the Restriction
Period, certificates representing the Restricted Shares and any securities
constituting Retained Distributions shall bear a restrictive legend to the
effect that ownership of the Restricted Shares (and such Retained
Distributions), and the enjoyment of all rights appurtenant thereto, are
subject to the restrictions, terms and conditions provided in the Plan and
the applicable Agreement. Such certificates shall remain in the custody of
the Company and the Holder shall deposit with the Company stock powers or
other instruments of assignment, each endorsed in blank, so as to permit
retransfer to the Company of all or any portion of the Restricted Shares
and any securities constituting Retained Distributions that shall be
forfeited or otherwise not become vested in accordance with the Plan and
the applicable Agreement.
8.3 Restrictions. Restricted Shares issued at the beginning of the
Restriction Period shall constitute issued and outstanding shares of Series
A Stock for all corporate purposes. The Holder will have the right to vote
such Restricted Shares, to receive and retain such dividends and
distributions, as the Committee may in its sole discretion designate, paid
or distributed on such Restricted Shares and to exercise all other rights,
powers and privileges of a Holder of Series A Stock with respect to such
Restricted Shares; except, that (a) the Holder will not be entitled to
delivery of the stock certificate or certificates representing such
Restricted Shares until the Restriction Period shall have expired and
unless all other vesting requirements with respect thereto shall have been
fulfilled or waived; (b) the Company will retain custody of the stock
certificate or certificates representing the Restricted Shares during the
Restriction Period as provided in Section 8.2; (c) other than such
dividends and distributions as the Committee may in its sole discretion
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designate, the Company will retain custody of all distributions ("Retained
Distributions") made or declared with respect to the Restricted Shares (and
such Retained Distributions will be subject to the same restrictions, terms
and vesting and other conditions as are applicable to the Restricted
Shares) until such time, if ever, as the Restricted Shares with respect to
which such Retained Distributions shall have been made, paid or declared
shall have become vested, and such Retained Distributions shall not bear
interest or be segregated in a separate account; (d) the Holder may not
sell, assign, transfer, pledge, exchange, encumber or dispose of the
Restricted Shares or any Retained Distributions or his interest in any of
them during the Restriction Period; and (e) a breach of any restrictions,
terms or conditions provided in the Plan or established by the Committee
with respect to any Restricted Shares or Retained Distributions will cause
a forfeiture of such Restricted Shares and any Retained Distributions with
respect thereto.
8.4 Issuance of Stock at End of the Restriction Period. Restricted
Shares issued at the end of the Restriction Period shall not constitute
issued and outstanding shares of Series A Stock and the Holder shall not
have any of the rights of a stockholder with respect to the shares of
Series A Stock covered by such an award of Restricted Shares, in each case
until such shares shall have been transferred to the Holder at the end of
the Restriction Period. If and to the extent that shares of Series A Stock
are to be issued at the end of the Restriction Period, the Holder shall be
entitled to receive Dividend Equivalents with respect to the shares of
Series A Stock covered thereby either (i) during the Restriction Period or
(ii) in accordance with the rules applicable to Retained Distributions, as
the Committee may specify in the Agreement.
8.5 Cash Awards. In connection with any award of Restricted Shares, an
Agreement may provide for the payment of a cash amount to the Holder of
such Restricted Shares at any time after such Restricted Shares shall have
become vested. Such cash awards shall be payable in accordance with such
additional restrictions, terms and conditions as shall be prescribed by the
Committee in the Agreement and shall be in addition to any other salary,
incentive, bonus or other compensation payments which such Holder shall be
otherwise entitled or eligible to receive from the Company.
8.6 Completion of Restriction Period. On the Vesting Date with respect
to each award of Restricted Shares, and the satisfaction of any other
applicable restrictions, terms and conditions (a) all or the applicable
portion of such Restricted Shares shall become vested, (b) any Retained
Distributions and any unpaid Dividend Equivalents with respect to such
Restricted Shares shall become vested to the extent that the Restricted
Shares related thereto shall have become vested and (c) any cash award to
be received by the Holder with respect to such Restricted Shares shall
become payable, all in accordance with the terms of the applicable
Agreement. Any such Restricted Shares, Retained Distributions and any
unpaid Dividend Equivalents that shall not become vested shall be forfeited
to the Company and the Holder shall not thereafter have any rights
(including dividend and voting rights) with respect to such Restricted
Shares, Retained Distributions and any unpaid Dividend Equivalents that
shall have been so forfeited. The Committee may, in its discretion, provide
that the delivery of any Restricted Shares, Retained Distributions and
unpaid Dividend Equivalents that shall have become vested, and payment of
any cash awards that shall have become payable, shall be deferred until
such date or dates as the recipient may elect. Any election of a
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recipient pursuant to the preceding sentence shall be filed in writing with
the Committee in accordance with such rules and regulations, including any
deadline for the making of such an election, as the Committee may provide.
Article IX
Stock Units
9.1 Grant. In addition to granting awards of Options, SARs and
Restricted Shares, the Committee shall have authority to grant to eligible
persons awards of Stock Units ("Stock Unit Awards") which may be in the
form of Series A Stock or units, the value of which is based, in whole or
in part, on the Fair Market Value of the Series A Stock. Subject to the
provisions of the Plan, including any rules established pursuant to Section
9.2, awards of Stock Units shall be subject to such terms, restrictions,
conditions, vesting requirements and payment rules as the Committee may
determine in its sole discretion, which need not be identical for each
Award. The determinations made by the Committee pursuant to this Section
9.1 shall be specified in the applicable Agreement.
9.2 Rules. The Committee may, in its sole discretion, establish any or
all of the following rules for application to an award of Stock Units:
(a) Any shares of Series A Stock which are part of an award of
Stock Units may not be assigned, sold, transferred, pledged or
otherwise encumbered prior to the date on which the shares are issued,
or if later, the date provided by the Committee at the time of the
Award.
(b) Such Awards may provide for the payment of cash consideration
by the person to whom such Award is granted or provide that the Award,
and Series A Stock to be issued in connection therewith, if
applicable, shall be delivered without the payment of cash
consideration; provided, however, that the issuance of any shares of
Series A Stock in connection with an award of Stock Units shall be for
at least the minimum consideration necessary to permit such shares to
be deemed fully paid and nonassessable.
(c) Awards of Stock Units may relate in whole or in part to
performance or other criteria established by the Committee at the time
of grant.
(d) Awards of Stock Units may provide for deferred payment
schedules, vesting over a specified period of employment, the payment
(on a current or deferred basis) of dividend equivalent amounts with
respect to the number of shares of Series A Stock covered by the
Award, and elections by the employee to defer payment of the Award or
the lifting of restrictions on the Award, if any.
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(e) In such circumstances as the Committee may deem advisable, the
Committee may waive or otherwise remove, in whole or in part, any
restrictions or limitations to which a Stock Unit Award was made
subject at the time of grant.
Article X
Performance Awards
10.1 Terms of Performance Awards. Subject to the limitations of the
Plan, the Committee shall designate those eligible persons to be granted
Performance Awards, shall determine the form and amount of each such award,
the time when each such award shall be granted, and the Performance Goals
applicable thereto, and may prescribe other restrictions, terms and
conditions applicable to such Award in addition to those provided in the
Plan. A Performance Award may be payable in the form of cash, property or
securities of the Company, including, without limitation, Options, SARs,
Restricted Shares and/or Stock Units. A Performance Award shall be paid,
vested or otherwise deliverable solely on account of the attainment of one
or more pre-established, objective Performance Goals established by the
Committee prior to the earlier to occur of (i) 90 days after the
commencement of the period of service to which the Performance Goal relates
and (ii) the passage of 25% of the period of service (as scheduled in good
faith at the time the goal is established), and in any event while the
outcome is substantially uncertain. A Performance Goal is objective if a
third party having knowledge of the relevant facts could determine whether
the goal is met.
10.2 Performance Goal Criteria. A Performance Goal may be based on one
or more business criteria that apply to the individual, one or more
business units of the Company, or the Company as a whole, and may include
one or more of the following: revenue, net income, cash flow (as defined
for such purpose by the Committee), stock price, market share, earnings per
share, return on equity, return on assets or decrease in costs. Unless
otherwise stated, such a Performance Goal need not be based upon an
increase or positive result under a particular business criterion and could
include, for example, maintaining the status quo or limiting economic
losses (measured, in each case, by reference to specific business
criteria). In interpreting Plan provisions applicable to Performance Goals
and Performance Awards, it is the intent of the Plan to conform with the
standards of Section 162(m) of the Code and Treasury Regulation (S) 1.162-
27(e)(2)(i), and the Committee in establishing such goals and interpreting
the Plan shall be guided by such provisions.
10.3 Committee Certification. Prior to the payment of any compensation
based on the achievement of Performance Goals, the Committee must certify
in writing that applicable Performance Goals and any of the material terms
thereof were, in fact, satisfied. Subject to the foregoing provisions, the
terms, conditions and limitations applicable to any Performance Awards made
pursuant to this Plan shall be determined by the Committee.
10.4 Certain Limitations. Notwithstanding anything to the contrary
contained in this Plan, any Performance Awards made hereunder shall be
limited so that no person may be granted
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Performance Awards consisting of cash or in any other form permitted under
this Plan (other than Awards consisting of Options or SARs or otherwise
consisting of shares of Common Stock or units denominated in such shares,
or, in either case, additional cash amounts related to such an Award) in
respect of any one-year period having a value determined on the date of
grant in excess of $10,000,000.
Article XI
General Provisions
11.1 Acceleration of Options, SARs, Restricted Shares, Stock Units and
Performance Awards.
(a) Death or Disability. If a Holder's employment (which term shall
include, as the context shall require, a Holder's period of service to the
Company and its Subsidiaries as a consultant or advisor) shall terminate by
reason of death or Disability, notwithstanding any contrary waiting period,
installment period, vesting schedule or Restriction Period in any Agreement
or in the Plan, unless the applicable Agreement provides otherwise: (i) in
the case of an Option or SAR, each outstanding Option or SAR granted under
the Plan shall immediately become exercisable in full in respect of the
aggregate number of shares covered thereby; (ii) in the case of Restricted
Shares, the Restriction Period applicable to each such award of Restricted
Shares shall be deemed to have expired and all such Restricted Shares, any
related Retained Distributions and any unpaid Dividend Equivalents shall
become vested and any cash amounts payable pursuant to the applicable
Agreement shall be adjusted in such manner as may be provided in the
Agreement, (iii) in the case of Stock Units, each such award of Stock Units
shall become vested in full, and (iv) in the case of Performance Awards,
each such Performance Award shall become vested in full.
(b) Approved Transactions; Board Changes; Control Purchases. In the
event of any Approved Transaction, Board Change or Control Purchase,
notwithstanding any contrary waiting period, installment period, vesting
schedule or Restriction Period in any Agreement or in the Plan, unless the
applicable Agreement provides otherwise: (i) in the case of an Option or
SAR, each such outstanding Option or SAR granted under the Plan shall
become exercisable in full in respect of the aggregate number of shares
covered thereby; (ii) in the case of Restricted Shares, the Restriction
Period applicable to each such award of Restricted Shares shall be deemed
to have expired and all such Restricted Shares, any related Retained
Distributions and any unpaid Dividend Equivalents shall become vested and
any cash amounts payable pursuant to the applicable Agreement shall be
adjusted in such manner as may be provided in the Agreement; (iii) in the
case of Stock Units, each such award of Stock Units shall become vested in
full; and (iv) in the case of Performance Awards, all Performance Goals
shall thereupon be deemed to have been achieved, fully vested and
immediately payable; in each case effective immediately prior to
consummation of the Approved Transaction; provided, however, that any
Options, SARs or, if applicable, Stock
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Units not theretofore exercised shall terminate upon consummation of the
Approved Transaction. Notwithstanding the foregoing, unless otherwise
provided in the applicable Agreement, the Committee may, in its discretion,
determine that any or all outstanding Awards of any or all types granted
pursuant to the Plan will not vest or become exercisable on an accelerated
basis, nor Performance Goals be deemed to have been achieved, in connection
with an Approved Transaction and/or will not terminate if not exercised
prior to consummation of the Approved Transaction, if the Board or the
surviving or acquiring corporation, as the case may be, shall have taken,
or made effective provision for the taking of, such action as in the
opinion of the Committee is equitable and appropriate to substitute a new
Award for such Award or to assume such Award and in order to make such new
or assumed Award, as nearly as may be practicable, equivalent to the old
Award (before giving effect to any acceleration of the vesting or
exercisability thereof), taking into account, to the extent applicable, the
kind and amount of securities, cash or other assets into or for which the
Series A Stock may be changed, converted or exchanged in connection with
the Approved Transaction.
11.2 Termination of Employment.
(a) General. If a Holder's employment shall terminate prior to the
complete exercise of an Option or SAR (or deemed exercise thereof, as
provided in Section 7.2) or during the Restriction Period with respect to
any Restricted Shares or prior to the vesting or complete exercise of any
Stock Units or Performance Award, then such Option, SAR, Stock Unit or
Performance Award shall thereafter be exercisable, and the Holder's rights
to any unvested Restricted Shares, Retained Distributions, unpaid Dividend
Equivalents and cash amounts and any such unvested Stock Units shall
thereafter vest solely to the extent provided in the applicable Agreement;
provided, however, that (i) no Option or SAR may be exercised after the
scheduled expiration date thereof; (ii) if the Holder's employment
terminates by reason of death or Disability, the Option or SAR shall remain
exercisable for a period of at least one year following such termination
(but not later than the scheduled expiration of such Option or SAR); and
(iii) any termination by the Company for cause will be treated in
accordance with the provisions of Section 11.2.
(b) Termination by Company for Cause. If a Holder's employment with
the Company or a Subsidiary shall be terminated by the Company or such
Subsidiary during the Restriction Period with respect to any Restricted
Shares, or prior to the exercise of any Option or SAR, or prior to the
vesting or exercise of any Stock Unit, or prior to the vesting of any
Performance Award, for cause, then (i) all Options and SARs and all
unvested or unexercised Stock Units held by such Holder shall immediately
terminate, (ii) such Holder's rights to all Restricted Shares, Retained
Distributions, any unpaid Dividend Equivalents and any cash awards shall be
forfeited immediately, and (iii) such Holder's interest in all unvested
Performance Awards shall be forfeited immediately. For purposes of this
Section 11.2, "cause" shall have the meaning ascribed thereto in any
employment agreement or Agreement to which such Holder is a party or, in
the absence thereof, shall include but not
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be limited to, insubordination, dishonesty, incompetence, moral turpitude,
other misconduct of any kind, or refusal to perform one's duties and
responsibilities for any reason other than illness or incapacity; provided,
however, that if such termination occurs within 12 months after an Approved
Transaction, Board Change or Control Purchase, "cause" shall mean only a
felony conviction for fraud, misappropriation or embezzlement.
(c) Miscellaneous. The Committee may determine whether any given leave
of absence constitutes a termination of employment; provided, however, that
for purposes of the Plan (i) any leave of absence, duly authorized in
writing by the Company for military service or sickness, or for any other
purpose approved by the Company if the period of such leave does not exceed
90 days, and (ii) any leave of absence in excess of 90 days, duly
authorized in writing by the Company, if the employee's right to
reemployment is guaranteed either by statute or contract, shall not be a
termination of employment. Awards made under the Plan shall not be affected
by any change of employment so long as the Holder continues to be an
employee of the Company or any Subsidiary.
11.3 Right of Company to Terminate Employment. Nothing contained in the
Plan or in any Award, and no action of the Company or the Committee with respect
thereto, shall confer or be construed to confer on any Holder any right to
continue in the employ of the Company or any of its Subsidiaries or interfere in
any way with the right of the Company or a Subsidiary to terminate the
employment of the Holder at any time, with or without cause; subject, however,
to the provisions of any employment agreement between the Holder and the Company
or any Subsidiary.
11.4 Nonalienation of Benefits. No right or benefit under the Plan shall be
subject to anticipation, alienation, sale, assignment, hypothecation, pledge,
exchange, transfer, encumbrance or charge, and any attempt to anticipate,
alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or
charge the same shall be void. No right or benefit hereunder shall in any manner
be liable for or subject to the debts, contracts, liabilities or torts of the
person entitled to such benefits.
11.5 Written Agreement. Each grant of an Option under the Plan shall be
evidenced by a stock option agreement which shall designate the Options granted
thereunder as Incentive Stock Options or Nonqualified Stock Options; each SAR
shall be evidenced by a stock appreciation rights agreement; each award of
Restricted Shares shall be evidenced by a restricted shares agreement; each
award of Stock Units shall be evidenced by a stock units agreement; and each
Performance Award shall be evidenced by a performance award agreement; each in
such form and containing such terms and provisions not inconsistent with the
provisions of the Plan as the Committee from time to time shall approve;
provided, however, that if more than one type of Award is made to the same
Holder, such Awards may be evidenced by a single agreement with such Holder.
Each grantee of an Option, SAR, Restricted Shares, Stock Units or Performance
Awards shall be notified promptly of such grant and a written agreement shall be
promptly executed and delivered by the Company and the grantee, provided that,
in the discretion of the Committee, such grant of Options, SARs, Restricted
Shares
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or Stock Units, or such Performance Award, as applicable, shall terminate if
such written agreement is not signed by such grantee (or his attorney) and
delivered to the Company within 60 days after the date the Committee approved
such grant. Any such written agreement may contain (but shall not be required to
contain) such provisions as the Committee deems appropriate (i) to insure that
the penalty provisions of Section 4999 of the Code will not apply to any stock
or cash received by the Holder from the Company or (ii) to provide cash payments
to the Holder to mitigate the impact of such penalty provisions upon the Holder.
Any such agreement may be supplemented or amended from time to time as approved
by the Committee as contemplated by Section 11.8(b).
11.6 Designation of Beneficiaries. Each person who shall be granted an
Award under the Plan may designate a beneficiary or beneficiaries and may change
such designation from time to time by filing a written designation of
beneficiary or beneficiaries with the Committee on a form to be prescribed by
it, provided that no such designation shall be effective unless so filed prior
to the death of such person.
11.7 Right of First Refusal. The Agreements may contain such provisions as
the Committee shall determine to the effect that if a Holder elects to sell all
or any shares of Series A Stock that such Holder acquired upon the exercise of
an Option or SAR or upon the vesting of Restricted Shares or Stock Units awarded
under the Plan, then such Holder shall not sell such shares unless such Holder
shall have first offered in writing to sell such shares to the Company at Fair
Market Value on a date specified in such offer (which date shall be at least
three business days and not more than ten business days following the date of
such offer). In any such event, certificates representing shares issued upon
exercise of Options or SARs and the vesting of Restricted Shares or Stock Units
shall bear a restrictive legend to the effect that transferability of such
shares are subject to the restrictions contained in the Plan and the applicable
Agreement and that the Company may cause the transfer agent for the Series A
Stock to place a stop transfer order with respect to such shares.
11.8 Termination and Amendment.
(a) General. No Awards may be made under the Plan on or after the
tenth anniversary of the Effective Date, or such earlier date as the Plan
may be terminated as provided herein. The Board or the Committee may at any
time prior to the tenth anniversary of the Effective Date terminate the
Plan, and may, from time to time, suspend or discontinue the Plan or modify
or amend the Plan in such respects as it shall deem advisable; except that
no such modification or amendment shall be effective prior to approval by
the Company's stockholders to the extent such approval is then required
pursuant to Section 162(m) of the Code in order to preserve the
deductibility to the Company of any compensation expense that may be
incurred by the Company with respect to any Award then outstanding (unless
the Company waives such condition with respect to any such amendment and/or
any such Award) or to the extent stockholder approval is otherwise required
by applicable legal requirements.
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<PAGE>
(b) Modification. No termination, modification or amendment of the
Plan may, without the consent of the person to whom any Award shall
theretofore have been granted, adversely affect the rights of such person
with respect to such Award. No modification, extension, renewal or other
change in any Award granted under the Plan shall be made after the grant of
such Award, unless the same is consistent with the provisions of the Plan.
With the consent of the Holder and subject to the terms and conditions of
the Plan (including Section 11.8(a)), the Committee may amend outstanding
Agreements with any Holder, including, without limitation, any amendment
which would (i) accelerate the time or times at which the Award may be
exercised and/or (ii) extend the scheduled expiration date of the Award.
Without limiting the generality of the foregoing, the Committee may, but
solely with the Holder's consent unless otherwise provided in the
Agreement, agree to cancel any Award under the Plan and issue a new Award
in substitution therefor, provided that the Award so substituted shall
satisfy all of the requirements of the Plan as of the date such new Award
is made. Nothing contained in the foregoing provisions of this Section
11.8(b) shall be construed to prevent the Committee from providing in any
Agreement that the rights of the Holder with respect to the Award evidenced
thereby shall be subject to such rules and regulations as the Committee
may, subject to the express provisions of the Plan, adopt from time to
time, or impair the enforceability of any such provision.
11.9 Government and Other Regulations. The obligation of the Company with
respect to Awards shall be subject to all applicable laws, rules and regulations
and such approvals by any governmental agencies as may be required, including,
without limitation, the effectiveness of any registration statement required
under the Securities Act of 1933, and the rules and regulations of any
securities exchange or association on or through which the Series A Stock may be
listed or quoted. For so long as the Series A Stock is registered under the
Exchange Act, the Company shall use its reasonable efforts to comply with any
legal requirements (i) to maintain a registration statement in effect under the
Securities Act of 1933 with respect to all shares of Series A Stock that may be
issued to Holders under the Plan, and (ii) to file in a timely manner all
reports required to be filed by it under the Exchange Act.
11.10 Withholding. The Company's obligation to deliver shares of Series A
Stock or pay cash in respect of any Award under the Plan shall be subject to
applicable federal, state and local tax withholding requirements. Federal,
state and local withholding tax due at the time of an Award, upon the exercise
of any Option or SAR or upon the vesting of, or expiration of restrictions with
respect to, Restricted Shares or Stock Units, as appropriate, may, in the
discretion of the Committee, be paid in shares of Series A Stock or Series B
Stock already owned by the Holder or through the withholding of shares otherwise
issuable to such Holder, upon such terms and conditions (including, without
limitation, the conditions referenced in Section 6.6) as the Committee shall
determine. If the Holder shall fail to pay, or make arrangements satisfactory
to the Committee for the payment, to the Company of all such federal, state and
local taxes required to be withheld by the Company, then the Company shall, to
the extent permitted by law, have the right to deduct from any payment of any
kind otherwise due to such Holder an amount equal to any federal, state or local
taxes of any kind required to be withheld by the Company with respect to such
Award.
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<PAGE>
11.11 Non-Exclusivity of the Plan. Neither the adoption of the Plan by the
Board nor the submission of the Plan to the stockholders of the Company for
approval shall be construed as creating any limitations on the power of the
Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options and the awarding of
stock and cash otherwise then under the Plan, and such arrangements may be
either generally applicable or applicable only in specific cases.
11.12 Exclusion from Pension and Profit-Sharing Computation. By acceptance
of an Award, unless otherwise provided in the applicable Agreement, each Holder
shall be deemed to have agreed that such Award is special incentive compensation
that will not be taken into account, in any manner, as salary, compensation or
bonus in determining the amount of any payment under any pension, retirement or
other employee benefit plan, program or policy of the Company or any Subsidiary.
In addition, each beneficiary of a deceased Holder shall be deemed to have
agreed that such Award will not affect the amount of any life insurance
coverage, if any, provided by the Company on the life of the Holder which is
payable to such beneficiary under any life insurance plan covering employees of
the Company or any Subsidiary.
11.13 Unfunded Plan. Neither the Company nor any Subsidiary shall be
required to segregate any cash or any shares of Series A Stock which may at any
time be represented by Awards, and the Plan shall constitute an "unfunded" plan
of the Company. Except as provided in Article VIII with respect to awards of
Restricted Shares and except as expressly set forth in writing, no employee
shall have voting or other rights with respect to shares of Series A Stock prior
to the delivery of such shares. Neither the Company nor any Subsidiary shall, by
any provisions of the Plan, be deemed to be a trustee of any Series A Stock or
any other property, and the liabilities of the Company and any Subsidiary to any
employee pursuant to the Plan shall be those of a debtor pursuant to such
contract obligations as are created by or pursuant to the Plan, and the rights
of any employee, former employee or beneficiary under the Plan shall be limited
to those of a general creditor of the Company or the applicable Subsidiary, as
the case may be. In its sole discretion, the Board may authorize the creation of
trusts or other arrangements to meet the obligations of the Company under the
Plan, provided, however, that the existence of such trusts or other arrangements
is consistent with the unfunded status of the Plan.
11.14 Governing Law. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
11.15 Accounts. The delivery of any shares of Series A Stock and the
payment of any amount in respect of an Award shall be for the account of the
Company or the applicable Subsidiary, as the case may be, and any such delivery
or payment shall not be made until the recipient shall have paid or made
satisfactory arrangements for the payment of any applicable withholding taxes as
provided in Section 11.10.
11.16 Legends. In addition to any legend contemplated by Section 11.7, each
certificate evidencing Series A Stock subject to an Award shall bear such
legends as the Committee deems
-21-
<PAGE>
necessary or appropriate to reflect or refer to any terms, conditions or
restrictions of the Award applicable to such shares, including, without
limitation, any to the effect that the shares represented thereby may not be
disposed of unless the Company has received an opinion of counsel, acceptable to
the Company, that such disposition will not violate any federal or state
securities laws.
11.17 Company's Rights. The grant of Awards pursuant to the Plan shall not
affect in any way the right or power of the Company to make reclassifications,
reorganizations or other changes of or to its capital or business structure or
to merge, consolidate, liquidate, sell or otherwise dispose of all or any part
of its business or assets.
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<PAGE>
EXHIBIT 10.6
[FORM OF]
INDEMNIFICATION AGREEMENT
-------------------------
This AGREEMENT is made and entered into this _____ day of October,
1996, by and between Tele-Communications, Inc., a Delaware corporation (the
"Company"), and Gary S. Howard ("Indemnitee").
WHEREAS it is essential to the Company and its subsidiaries to retain
and attract as officers the most capable persons available;
WHEREAS Indemnitee is an officer of TCI Communications, Inc. ("TCIC")
and an officer and director of TCI Digital Satellite Entertainment, Inc.
("Digital") and TCI Satellite Entertainment, Inc. ("Satellite"), each of which
is a subsidiary of the Company;
WHEREAS both the Company and Indemnitee recognize the increased risk
of litigation and other claims routinely being asserted against directors of
public companies in today's environment, and the attendant costs of defending
even wholly frivolous claims;
WHEREAS it has become increasingly difficult to obtain insurance
against the risk of personal liability of directors on terms providing
reasonable protection at reasonable cost;
WHEREAS the Bylaws of the Company, TCIC, Digital and Satellite provide
certain indemnification rights to officers and directors of such corporations,
and the officers and directors of such corporations have been otherwise assured
indemnification, as provided by Delaware law;
WHEREAS in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's service to the
Company and its subsidiaries in an effective manner, the increasing difficulty
in obtaining and maintaining satisfactory insurance coverage, and Indemnitee's
reliance on assurances of indemnification, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses (whether
partial or complete) to Indemnitee to the fullest extent permitted by law and as
set forth in this Agreement, and, to the extent insurance is maintained, for the
continued coverage of Indemnitee under the Company's directors' and officers'
liability insurance policies; and
WHEREAS Indemnitee has agreed to serve as an officer and/or director
of the Company and/or one or more subsidiaries of the Company in reliance on the
protections and benefits afforded to him under and in accordance with this
Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements contained herein and Indemnitee's agreement to serve as an
officer and/or director of the Company and/or one or more subsidiaries of the
Company, the parties hereto agree as follows:
1. Certain Definitions: As used in this Agreement, the following
-------------------
terms shall have the corresponding meanings:
(a) A "Change in Control" shall be deemed to have occurred if (i)
-----------------
any "person" (as such term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), other than any
Specified Person (as defined below), is or becomes a "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the total voting
power represented by the Company's then outstanding Voting Securities,
without the prior approval of a majority of the Board of Directors of the
Company (the "Board"), or (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the whole Board
and any new director whose election by the Board or nomination for election
by the Company's stockholders was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a majority
thereof, or (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation approved in advance of such stockholder vote by a
majority of the Board, or the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company (in one transaction or a series of transactions)
of all or substantially all the Company's assets. For purposes of this
definition, "Specified Person" means each of (1) the Chairman of the Board
of the Company as of the date of this Agreement, (2) the President of the
Company as of the date of this Agreement, (3) the spouse, siblings, lineal
descendants, estates and heirs of such Chairman of the Board or such
President, or any trust or other investment vehicle for the primary benefit
of such Chairman of the Board or such President and/or the spouse,
siblings, lineal descendants and/or heirs of any such person, (4) Kearns-
Tribune Corporation, a Delaware corporation or any successor thereto by
merger or consolidation and (5) the trustee under the qualified employee
stock purchase plan of the Company or any successor plan. The trustee
under the qualified employee stock purchase plan of the Company or any
successor plan shall be deemed to have beneficial ownership of all shares
of common stock of the Company held under the plan, whether or not
allocated to or vested in participants' accounts.
(b) "Claim" means any threatened, pending or completed action,
-----
suit or proceeding, whether instituted by or in the right of the Company or
by any other party, or any inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action, suit or
proceeding, whether civil (including without limitation intentional and
unintentional tort claims), criminal, administrative, investigative or
other.
2
<PAGE>
(c) "Expenses" means and includes attorneys' fees, disbursements
--------
and other charges and all other costs, expenses and obligations whatsoever
paid or incurred in connection with investigating, defending, being a
witness in, participating in (including on appeal), or preparing for any
Claim relating to or arising in whole or in part out of any Indemnifiable
Event.
(d) "Indemnifiable Event" means any event or occurrence related
-------------------
to or arising out of the fact that Indemnitee is or was an officer,
director, employee, agent or fiduciary of the Company or any subsidiary of
the Company, or is or was serving at the request of the Company as an
officer, director, employee, agent, fiduciary or trustee of any other
corporation, partnership, joint venture, employee benefit plan, trust or
other enterprise, or any event or occurrence related to or arising out of
anything done or not done by Indemnitee in any such capacity.
(e) "Independent Legal Counsel" means an attorney or firm of
-------------------------
attorneys, selected in accordance with the provisions of Section 3, who
shall not have otherwise performed services for the Company or Indemnitee
within the last five years (other than with respect to matters concerning
the rights of Indemnitee under this Agreement, or of other indemnitees
under similar indemnification agreements or under the Company's Bylaws).
(f) "Reviewing Party" means an appropriate person or body
---------------
consisting of a member or members of the Company's Board of Directors or
any other independent and impartial person or body appointed by the
Company's Board of Directors who is not a party to the particular Claim for
which Indemnitee is seeking indemnification, or Independent Legal Counsel,
as determined pursuant to Section 2(b).
(g) "Voting Securities" means securities of the Company that vote
-----------------
generally in the election of directors.
2. Basic Indemnification Arrangement.
---------------------------------
(a) If Indemnitee was, is or becomes a party to or witness or other
participant in, or is threatened to be made a party to or witness or other
participant in, any Claim relating to or arising in whole or in part out of an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law as soon as practicable but in any event no later than
thirty days after written demand is presented to the Company, against any and
all Expenses, judgments, fines, penalties and amounts paid or payable in
settlement (including all interest, assessments and other charges paid or
payable in connection with or in respect of such Expenses, judgments, fines,
penalties or amounts paid or payable in settlement) of such Claim. If so
requested by Indemnitee, the Company shall advance (within two business days
after such request) any and all Expenses to Indemnitee (an "Expense Advance").
(b) Notwithstanding the foregoing, (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing Party
shall not have
3
<PAGE>
determined, which determination shall, in all cases, be in a written opinion
specifying in reasonable detail the reasons therefor, that Indemnitee would not
be permitted to be indemnified under applicable law, and (ii) the obligation of
the Company to make an Expense Advance pursuant to Section 2(a) shall be subject
to the condition that, if, when and to the extent that the Reviewing Party
determines by rendering such written opinion that Indemnitee would not be
permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
-------- -------
Indemnitee pursues legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee should be indemnified under applicable
law, (A) any determination made by the Reviewing Party that Indemnitee would not
be permitted to be indemnified under applicable law shall not be binding, (B)
the obligations of the Company to indemnify Indemnitee and to make Expense
Advances pursuant to Section 2(a) shall continue in full force and effect, and
(C) Indemnitee shall not be required to reimburse the Company for any Expense
Advance, in each case until a final judicial determination is made with respect
thereto (as to which all rights of appeal therefrom have been exhausted or
lapsed). If there has not been a Change in Control, the Reviewing Party shall
be selected by the Board of Directors, and if there has been a Change in
Control, the Reviewing Party shall be the Independent Legal Counsel referred to
in Section 3 hereof. If there has been no determination by the Reviewing Party
or if the Reviewing Party determines that Indemnitee substantively would not be
permitted to be indemnified in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation in any court in the State of
Delaware or the State of Colorado having subject matter jurisdiction thereof and
in which venue is proper seeking an initial determination by the court or
challenging any such determination by the Reviewing Party or any aspect thereof,
including the legal or factual bases therefor, and the Company hereby consents
to service of process and agrees to appear in any such proceeding and hereby
waives any objection that venue in any court is not proper. Any determination
by the Reviewing Party otherwise shall be conclusive and binding on the Company
and Indemnitee.
3. Change in Control. The Company agrees that if there is a Change
-----------------
in Control of the Company then with respect to all matters thereafter arising
concerning the rights of Indemnitee to indemnity payments and Expense Advances
under this Agreement or any other agreement or Company Bylaw now or hereafter in
effect relating to Claims arising in whole or in part out of Indemnifiable
Events, the Company shall seek and obtain legal advice with respect thereto from
Independent Legal Counsel selected by Indemnitee and approved by the Company
(which approval shall not be unreasonably withheld or delayed). Such
Independent Legal Counsel, among other things, shall be responsible for making
any determination to be made by the Reviewing Party pursuant to Section 2(b) and
shall render its written opinion to the Company and Indemnitee as to whether and
to what extent Indemnitee would be permitted to be indemnified under applicable
law. The Company agrees to pay the reasonable fees, disbursements and other
charges of the Independent Legal Counsel referred to above and to fully
indemnify such counsel against any and all expenses (including attorneys' fees,
disbursements and other charges), claims, liabilities and damages arising out of
or relating to this Agreement or its engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall
---------------------------------------
indemnify Indemnitee against (and, if requested by Indemnitee, shall advance to
Indemnitee within two
4
<PAGE>
business days after any such request) any and all Expenses incurred by
Indemnitee in connection with any action brought by Indemnitee for (i)
indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or Company Bylaw now or hereafter in effect
relating to Claims arising in whole or in part out of Indemnifiable Events or
(ii) recovery under any directors' and officers' liability insurance policies
maintained by the Company, regardless of whether Indemnitee ultimately is
determined to be entitled to such indemnification, advance expense payment or
insurance recovery, as the case may be.
5. Partial Indemnity. If Indemnitee is entitled under any provision
-----------------
of this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim,
but not, however, for the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
6. Burden of Proof. In connection with any determination by the
---------------
Reviewing Party or otherwise as to whether Indemnitee is entitled to be
indemnified hereunder, the burden of proof shall be on the Company to establish
that Indemnitee is not so entitled.
7. No Presumptions. For purposes of this Agreement:
---------------
(a) the termination of any claim, action, suit or proceeding, by
judgment, order, settlement (whether with or without court approval) or
conviction, or upon a plea of nolo contendere, or its equivalent, shall not
create a presumption that Indemnitee did not meet any particular standard
of conduct or have any particular belief or that a court has determined
that indemnification is not permitted by applicable law; and
(b) neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor, except as expressly provided in
Section 2(b) hereof, an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such
belief, shall be a defense to any claim by Indemnitee that he is entitled
to indemnification, or create a presumption that Indemnitee has not met any
particular standard of conduct or did not have any particular belief, in
any legal proceeding considering whether Indemnitee should be indemnified
under applicable law.
8. Nonexclusivity; Subsequent Change in Law. The rights of
----------------------------------------
Indemnitee hereunder shall be in addition to any other rights Indemnitee may
have from time to time under the Company's Bylaws or the General Corporation Law
of the State of Delaware or otherwise, and nothing contained in this Agreement
shall derogate or limit Indemnitee's rights to indemnification as provided under
the Company's Bylaws or applicable law. To the extent that a change in the
General Corporation Law of the State of Delaware (whether by statute or judicial
decision) permits greater indemnification by agreement than would be afforded
currently under the Company's Bylaws
5
<PAGE>
and this Agreement, it is the intent of the parties hereto that Indemnitee shall
enjoy by this Agreement the greater benefits so afforded by such change.
9. Liability Insurance. To the extent the Company maintains an
-------------------
insurance policy or policies providing directors' and officers' liability
insurance that permits coverage of persons who are or were officers or directors
of TCIC, Digital and/or Satellite, Indemnitee shall be covered by such policy or
policies, in accordance with its or their terms, to the maximum extent of the
coverage available for any director or officer of TCIC, Digital and/or
Satellite.
10. Amendments; Waiver. No supplement, modification or amendment of
------------------
this Agreement shall be binding unless executed in writing by both the Company
and Indemnitee. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
11. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all rights of
recovery of Indemnitee relating thereto, and Indemnitee shall execute all papers
required and shall do everything that may be necessary to secure such rights,
including the execution of such documents necessary to enable the Company
effectively to bring suit to enforce such rights; provided however, that the
Company shall not enforce any of such rights in any manner or at any time as
would prevent or delay payment to Indemnitee of all amounts owing to him.
12. No Duplication of Payments. The Company shall not be liable
--------------------------
under this Agreement to make any payment in connection with any Claim made
against Indemnitee to the extent Indemnitee has otherwise actually received
payment (under any insurance policy, Bylaw or otherwise) of the amounts
otherwise indemnifiable hereunder.
13. Binding Effect. This Agreement shall be binding upon and inure
--------------
to the benefit of and be enforceable by the parties hereto and their respective
successors (including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or substantially all of the business or assets
of the Company), assigns, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in full force and effect in
perpetuity, unless and until terminated by written instrument signed by both the
Company and Indemnitee, regardless of whether Indemnitee continues to serve as
an officer, director, employee, agent or fiduciary of the Company or any of its
subsidiaries or as an officer, director, employee, agent, fiduciary or trustee
of any other enterprise at the Company's request.
14. Severability. The provisions of this Agreement shall be
------------
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) is held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable in any
respect, and the validity and enforceability of any such provision in every
other respect and of the remaining provisions hereof shall not be in any way
impaired and shall remain enforceable to the fullest extent permitted by law.
6
<PAGE>
15. Effective Date. This Agreement shall be effective as of the date
--------------
hereof and shall apply to any claim for indemnification by the Indemnitee on or
after such date, whether such claim for indemnification relates to or arises out
of, in whole or in part, events or circumstances occurring or existing before,
on, or after the date hereof.
16. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state, without giving effect to the
principles of conflicts of laws thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth above.
TELE-COMMUNICATIONS, INC.
By:_____________________________________
Name:
Title:
-----------------------------------------
Gary S. Howard
7
<PAGE>
Exhibit 10.7
------------
TCI SATELLITE ENTERTAINMENT, INC.
Option to Purchase Series A Common Stock
THIS AGREEMENT ("Agreement") is made as of the ____ day of November, 1996,
by and between TCI SATELLITE ENTERTAINMENT, INC., a Delaware corporation (the
"Company"), and Gary S. Howard ("Grantee").
Prior the date hereof the Company has been a subsidiary of Tele-
Communications, Inc., a Delaware corporation ("TCI"). The Company has adopted
the TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan (the "Plan"), a
copy of which is attached hereto as Exhibit A, for the benefit of eligible
employees of the Company and its Subsidiaries. The Plan is administered by the
Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board"), and is an integral part of this Agreement.
Pursuant to the Plan, the Committee has determined that it is in the best
interests of the Company to grant Grantee the rights and option set forth herein
in order to provide Grantee with additional remuneration for services rendered
to the Company and its predecessors, to encourage Grantee to remain in the
employ of the Company, and to provide additional incentive to Grantee by
increasing Grantee's proprietary interest in the continued success and progress
of the Company.
Certain capitalized terms that are used herein are defined in paragraph 18
hereof. Capitalized terms that are used but not defined herein shall have the
meaning ascribed thereto in the Plan.
Accordingly, the Company and Grantee hereby agree as follows:
1. Grant of Option; Option Term. The Company hereby grants to Grantee the
right and option (the "Option"), on the terms and subject to the conditions set
forth herein, to purchase the Option Shares from the Company for a price per
Option Share equal to the Option Price. Subject to paragraph 2 hereof, the
Option shall be exercisable in whole at any time and in part from time to time
during the period commencing on the date hereof and expiring at 5:00 p.m.,
Denver, Colorado time ("Close of Business") on the tenth anniversary of the
Determination Date, or such earlier date as the Option may be terminated
pursuant to paragraph 6 or paragraph 9(b) hereof (the "Option Term").
2. Conditions of Exercise; Vesting. Except as otherwise provided in the last
sentence of this paragraph 2 or in paragraph 9(b), the Option shall not be
exercisable until the first anniversary of the Determination Date, and, from the
first anniversary of the Determination Date to the fifth anniversary of the
Determination Date, the Option shall be exercisable only to the extent the
Option Shares have become available for purchase in accordance with the
following schedule:
<PAGE>
Anniversary of Percentage of Option Shares
Determination Date Available for Purchase
------------------ ---------------------------
1st 20%
2nd 40%
3rd 60%
4th 80%
5th 100%
Notwithstanding the foregoing, all Option Shares shall become available for
purchase if during the Option Term (i) Grantee's employment with the Company and
its Subsidiaries shall terminate by reason of (x) termination by the Company or
any Subsidiary without Cause, (y) termination by Grantee for Good Reason or (z)
Disability, (ii) Grantee's employment shall terminate pursuant to provisions of
a written employment agreement, if any, between Grantee and the Company or any
Subsidiary which expressly permits Grantee to terminate such employment upon the
occurrence of specified events (other than the giving of notice and passage of
time) or (iii) Grantee dies while employed by the Company or a Subsidiary.
3. Manner of Exercise. The Option may be exercised only by delivering to the
Company all of the following and shall be considered exercised (as to the number
of shares specified in the notice referred to in clause (a) below) on the later
of (i) the first business day on which the Company has received all of the
following deliveries and (ii) the date of exercise designated in the written
notice referred to in clause (a) below (or if such date is not a business day,
the first business day thereafter):
(a) written notice, in such form as the Committee may reasonably require,
stating that Grantee is exercising the Option and setting forth the date of
such exercise, the number of Option Shares to be purchased, the aggregate
purchase price to be paid for such Option Shares in accordance with this
Agreement and the manner in which such payment is being made;
(b) payment of the Option Price for each Option Share to be purchased upon
such exercise, in cash or in such other form or combination of forms of
payment contemplated by paragraph 10 hereof, together with payment of, or
other provision acceptable to the Committee for, any and all withholding taxes
required to be withheld by the Company upon such exercise, in accordance with
paragraph 4 hereof; and
(c) any other documentation that the Committee may reasonably require
(including, without limitation, proof satisfactory to the Committee that the
Option is then exercisable for the number of Option Shares set forth in such
notice).
4. Withholding for Taxes. It shall be a condition precedent to any exercise of
the Option that Grantee make provision acceptable to the Company for the payment
or withholding of
2
<PAGE>
any and all federal, state and local taxes required to be withheld by the
Company to satisfy the tax liability associated with such exercise, as
determined by the Board.
5. Delivery by the Company. As soon as practicable after receipt of all the
items required by paragraph 3 hereof with respect to any exercise of the Option,
and subject to the withholding referred to in paragraph 4 hereof, the Company
shall deliver or cause to be delivered to Grantee certificates issued in
Grantee's name for the number of whole Option Shares purchased upon such
exercise. If delivery is by mail, delivery of Option Shares shall be deemed
effected for all purposes when a stock transfer agent of the Company shall have
deposited the certificates in the United States mail, addressed to Grantee, and
any cash payment (for fractional shares or otherwise) shall be deemed effected
when a Company check, payable to Grantee and in an amount equal to the amount of
the cash payment, shall have been deposited in the United States mail, addressed
to Grantee, in each case in accordance with Section 12.
6. Early Termination of Option. Unless otherwise determined by the Committee
in its sole discretion, the Option shall terminate, prior to the expiration of
the ten-year period provided for in paragraph 1 hereof, as follows:
(a) If Grantee's employment with the Company and its Subsidiaries
terminates other than (i) by Grantee with Good Reason, (ii) by reason of
Grantee's death or Disability, (iii) with the written consent of the Company
or the applicable Subsidiary, (iv) without such consent if such termination is
pursuant to provisions of a written employment agreement, if any, between
Grantee and the Company or the applicable Subsidiary which expressly permits
Grantee to terminate such employment upon the occurrence of specified events
(other than the giving of notice and passage of time), or (v) by the Company
with or without Cause, then the Option shall terminate at the Close of
Business on the first business day following the expiration of the 90-day
period beginning on the date of termination of Grantee's employment;
(b) If Grantee dies while employed by the Company or one of its
Subsidiaries, or prior to the expiration of a relevant period of time during
which the Option remains exercisable as provided in this paragraph 6, the
Option shall terminate at the Close of Business on the first business day
following the expiration of the one-year period beginning on the date of
death;
(c) If Grantee's employment with the Company and its Subsidiaries
terminates by reason of Disability, then the Option shall terminate at the
Close of Business on the first business day following the expiration of the
one-year period beginning on the date of termination of Grantee's employment;
(d) If Grantee's employment with the Company and its Subsidiaries is
terminated by the Company or any Subsidiary for Cause, then the Option shall
terminate immediately upon such termination of Grantee's employment; and
3
<PAGE>
(e) If Grantee terminates his employment with the Company and its
Subsidiaries (i) with Good Reason, (ii) with the written consent of the
Company or the applicable Subsidiary or (iii) pursuant to provisions of a
written employment agreement, if any, between Grantee and the Company or
the applicable Subsidiary which expressly permits Grantee to terminate such
employment upon the occurrence of specified events (other than the giving
of notice and passage of time), or if the Company terminates Grantee's
employment with the Company and its Subsidiaries without Cause, then the
Option Term shall not terminate prior to the end of the ten-year period
provided for in paragraph 1 hereof, except as otherwise provided for in
paragraph 6(b) or 9(b).
In any event in which the Option remains exercisable for a period of time
following the date of termination of Grantee's employment as provided above, the
Option may be exercised during such period of time only to the extent it was
exercisable as provided in paragraph 2 or paragraph 9(b) on such date of
termination of Grantee's employment. A change of employment is not a
termination of employment within the meaning of this paragraph 6, provided that,
--------
after giving effect to such change, Grantee continues to be an employee of the
Company or any Subsidiary. Anything contained herein to the contrary
notwithstanding, the Option shall in any event terminate upon the expiration of
the ten-year period provided for in paragraph 1 hereof, if not theretofore
terminated.
7. Nontransferability of Option. During Grantee's lifetime, the Option is
not and shall not be transferable (voluntarily or involuntarily) other than
pursuant to a Domestic Relations Order and, except as otherwise required
pursuant to a Domestic Relations Order, is exercisable only by Grantee or
Grantee's court appointed legal representative. Grantee may designate a
beneficiary or beneficiaries to whom the Option shall pass upon Grantee's death
and may change such designation from time to time by filing a written
designation of beneficiary or beneficiaries with the Company on the form annexed
hereto as Exhibit B or such other form as may be prescribed by the Committee,
provided that no such designation shall be effective unless so filed prior to
the death of Grantee. If no such designation is made or if the designated
beneficiary does not survive Grantee's death, the Option shall pass by will or
the laws of descent and distribution. Following Grantee's death, the Option, if
otherwise exercisable, may be exercised by the person to whom the Option passes
according to the foregoing, and such person shall be deemed to be Grantee for
purposes of any applicable provisions of this Agreement.
8. No Shareholder Rights; No Guarantee of Employment. (a) Grantee shall
not be deemed for any purpose to be, or to have any of the rights of, a
stockholder of the Company with respect to any Option Shares unless and until
such Option Shares have been issued to Grantee by the Company. The existence of
this Agreement or the Option shall not affect in any way the right or power of
the Company or its stockholders to accomplish any corporate act, including,
without limitation, the acts referred to in Section 11.17 of the Plan.
(b) Nothing contained in this Agreement, and no action by the Company
or the Committee with respect hereto, shall confer or be construed to confer on
Grantee any right to continue in the employ of the Company or any Subsidiary or
interfere in any way with the right of
4
<PAGE>
the Company or any employing Subsidiary to terminate Grantee's employment at any
time, with or without Cause, except as otherwise expressly provided in any
written employment agreement between the Company or any Subsidiary and Grantee.
9. Adjustments. (a) The Option shall be subject to adjustment (including,
without limitation, as to the number of Option Shares and the Option Price per
share) in the sole discretion of the Committee and in such manner as the
Committee may deem equitable and appropriate in connection with the occurrence
of any of the events described in Section 4.2 of the Plan following the
Determination Date; provided, however, that adjustments shall be made to the
-------- -------
Option if, and in the same manner that, adjustments are being made in connection
with the occurrence of any such event to any other option granted under the
Plan. Adjustments to the Option Price shall be made on a per share basis so that
the aggregate remaining Option Price is unchanged.
(b) In the event of any Approved Transaction, Board Change or Control
Purchase, the Option shall become exercisable in full without regard to
paragraph 2; provided, however, that to the extent not theretofore exercised the
-------- -------
Option shall terminate upon the first to occur of the consummation of the
Approved Transaction or the expiration or early termination of the Option Term.
Notwithstanding the foregoing, the Committee may, in its discretion, determine
that the Option will not become exercisable on an accelerated basis in
connection with an Approved Transaction and/or will not terminate if not
exercised prior to consummation of the Approved Transaction, if the Board or the
surviving or acquiring corporation, as the case may be, shall have taken or made
effective provision for the taking of such action as in the opinion of the
Committee is equitable and appropriate to substitute a new Award for the Award
evidenced by this Agreement or to assume this Agreement and the Award evidenced
hereby and in order to make such new or assumed Award, as nearly as may be
practicable, equivalent to the Award evidenced by this Agreement as then in
effect (but before giving effect to any acceleration of the exercisability
hereof unless otherwise determined by the Committee), taking into account, to
the extent applicable, the kind and amount of securities, cash or other assets
into or for which the Company Series A Common Stock may be changed, converted or
exchanged in connection with the Approved Transaction.
(c) If the Distribution does not occur prior to the time that the Option
becomes exercisable, the Option Price and Option Shares shall be appropriately
adjusted so that the Option shall be exercisable, in the aggregate, for 1% of
the issued and outstanding common equity of the Company (after giving effect to
the transactions contemplated by the Reorganization Agreement other than the
Distribution), for an aggregate purchase price equal to 1% of TCI's Net
Investment as of the date the Option first becomes exercisable, but excluding
any portion of TCI's Net Investment that as of such date is represented by a
promissory note or other evidence of indebtedness from the Company (or any of
its subsidiaries) to TCI (or any subsidiary of TCI).
10. Manner of Payment. The method or methods of payment of the Option
Price for the shares of Company Series A Common Stock to be purchased upon
exercise of the Option and any amounts required by paragraph 4 shall consist of
(i) cash, (ii) check, (iii) promissory note in such form as shall be acceptable
to the Committee (except that this method of payment will not be
5
<PAGE>
available for amounts required by paragraph 4), (iv) whole shares of Company
Series A Common Stock and/or Company Series B Common Stock already owned by
Grantee, (v) the withholding of shares of Company Series A Common Stock issuable
upon exercise of the Option, (vi) the delivery, together with a properly
executed exercise notice, of irrevocable instructions to a broker to deliver
promptly to the Company the amount of sale or loan proceeds required to pay the
purchase price, or (vii) any combination of the foregoing methods of payment, as
Grantee may elect and shall designate in the exercise notice provided for in
paragraph 3 hereof, subject, however, to any restrictions or limitations of
applicable law or of any agreement evidencing indebtedness of the Company for
borrowed money. Any shares of capital stock delivered or withheld in payment of
any amount due hereunder shall be valued for such purposes at the Fair Market
Value of such shares on the applicable date of exercise of the Option.
11. Restrictions Imposed by Law. Grantee acknowledges that neither the
Option nor any of the Option Shares has been registered under the Securities Act
of 1933 and that the Option Shares may not be transferred in the absence of such
registration or the availability of an exemption therefrom under such Act or the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder. Neither the Company nor any other person shall have any obligation
to register any Option Shares, or any transfer of Option Shares, under the
Securities Act of 1933, the Securities Exchange Act of 1934 or any other state
or federal securities law. Certificates representing Option Shares purchased by
Grantee hereunder may bear such restrictive and other legends as counsel for the
Company shall require in order to insure compliance with any such law or any
rule or regulation promulgated thereunder. Without limiting the generality of
Section 11.9 of the Plan, Grantee agrees that Grantee will not exercise the
Option (and that the Company shall not be obligated to deliver any Option Shares
upon any exercise of the Option) if counsel for the Company determines that such
exercise or delivery would violate any applicable law or any rule or regulation
of any governmental authority, or any rule or regulation of, or agreement of the
Company with, any securities exchange or association upon which the Company
Series A Common Stock is listed or quoted. The Company shall in no event be
obligated to take any affirmative action in order to cause the exercise of the
Option or the resulting delivery of the shares of Company Series A Common Stock
to comply with any such law, rule, regulation or agreement.
12. Notice. Unless the Company notifies Grantee in writing of a change of
address, any notice or other communication to the Company with respect to this
Agreement shall be in writing and shall be delivered personally or sent by first
class mail, postage prepaid and addressed as follows
TCI Satellite Entertainment, Inc.
8085 South Chester, Suite 300
Englewood, Colorado 80112
Attention: General Counsel
6
<PAGE>
Any notice or other communication by the Company to Grantee with respect to this
Agreement shall be in writing and shall be delivered personally, or shall be
sent by first class mail, postage prepaid, to Grantee's address as listed in the
records of the Company on the Determination Date, unless the Company has
received written notification from Grantee of a change of address. Except as
otherwise provided in paragraph 5, all notices and other communications
hereunder, including without limitation any notice of exercise, shall be
effective when actually received.
13. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware.
14. Construction. References in this Agreement to "this Agreement" and the
words "herein," "hereof," "hereunder" and similar terms refer to this Agreement,
including all Exhibits, as a whole, unless the context otherwise requires. The
headings of the paragraphs of this Agreement have been included for convenience
of reference only, are not to be considered a part hereof and shall not modify
or restrict any of the terms or provisions hereof. This Agreement shall be
construed in accordance with the Plan and the administrative interpretations
adopted by the Committee thereunder. All decisions of the Committee upon
questions regarding the Plan or this Agreement shall be conclusive.
15. Duplicate Originals. The Company and Grantee may sign any number of
copies of this Agreement. Each signed copy shall be an original, but all of
them together represent the same agreement.
16. Entire Agreement. This Agreement is in satisfaction of and in lieu of
all prior discussions and agreements, oral or written, between or among TCI, the
Company and Grantee, or any of them, with respect to the subject matter hereof.
Each of the Company and Grantee hereby declares and represents that no promise
or agreement not herein expressed has been made and that this Agreement
(including the Plan, which is an integral part hereof) contains the entire
agreement between and among the parties hereto with respect to the Option and
supersedes and makes null and void any prior agreements between or among TCI,
the Company and Grantee, or any of them, regarding the Option.
17. Amendment. This Agreement may be amended, modified or supplemented by
the Company, without the consent of the Grantee, (i) to cure any ambiguity or to
correct or supplement any provision herein which may be defective or
inconsistent with any other provision herein or (ii) to make such other changes
as the Company, upon advice of counsel, determines are necessary or advisable
because of the adoption or promulgation of, or change in or of the
interpretation of, any law or governmental rule or regulation, including,
without limitation, any applicable federal or state securities laws. Except as
provided above, this Agreement may be amended, modified or supplemented only by
written agreement of the parties hereto.
18. Definitions. As used in this Agreement, the following terms have the
corresponding meanings:
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<PAGE>
"Aggregate Option Price" means an amount equal to one percent (1%) of TCI's
Net Investment as of the first to occur of the date of the Distribution and the
date on which the Option first becomes exercisable, but excluding any portion of
TCI's Net Investment that as of such date is represented by a promissory note or
other evidence of indebtedness from the Company (or any of its subsidiaries) to
TCI (or any subsidiary of TCI).
"Cause" has the meaning ascribed thereto in any employment agreement
between Grantee and the Company or any of its Subsidiaries, and in the absence
of any such employment agreement means insubordination, dishonesty,
incompetence, moral turpitude, other misconduct of any kind, or refusal to
perform one's duties and responsibilities for any reason other than illness or
incapacity, or negligence in the performance of any of one's material duties or
responsibilities that continues after written notice from the Company, as
determined conclusively by the Committee.
"Company Series A Common Stock" means the Series A Common Stock, $1.00 par
value per share, of the Company.
"Company Series B Common Stock" means the Series B Common Stock, $1.00 par
value per share, of the Company.
"Determination Date" means February 1, 1996.
"Distribution" means the proposed distribution by TCI, in a transaction
intended to be a tax-free spin-off, of all the issued and outstanding shares of
capital stock of the Company to the holders of shares of Tele-Communications,
Inc. Series A TCI Group Common Stock and Tele-Communications, Inc. Series B TCI
Group Common Stock.
"Good Reason" means the occurrence of any of the following prior to any
termination of employment by Grantee:
(i) any reduction in Grantee's annual rate of salary;
(ii) a failure by the Company to continue in effect any employee benefit
plan in which Grantee was participating, or the taking of any action
by the Company that would adversely affect Grantee's participation
in, or materially reduce Grantee's benefits under, any such employee
benefit plan, unless such failure or such taking of any action
adversely affects the senior members of the corporate management of
the Company generally; or
(iii) the assignment to Grantee of duties and responsibilities that are
materially more oppressive or onerous than those attendant to
Grantee's position on the Determination Date.
"Option Price" means an amount per Option Share equal to the quotient of
(i) the Aggregate Option Price divided by (ii) the total number of Option Shares
on the date of the Distribution, immediately after giving effect thereto, as
such amount per Option Share may be
8
<PAGE>
adjusted from time to time after the Distribution pursuant to paragraph 9
hereof. Within five business days after the date of the Distribution, the
Committee shall give Grantee written notice of the Option Price as of the date
of the Distribution, which notice shall be conclusive absent manifest error.
"Option Shares" means an aggregate number of shares of Company Series A
Common Stock equal to one percent (1%) of the total number of shares of Company
Series A Common Stock and Company Series B Common Stock issued and outstanding
on the date of the Distribution, immediately after giving effect thereto.
Within five business days after the date of the Distribution, the Committee
shall give Grantee written notice of the aggregate number of the Option Shares
as of the date of the Distribution, which notice shall be conclusive absent
manifest error.
"Other Options" means the options to purchase shares of Company Series A
Common Stock granted pursuant to those other Option Agreements dated as of the
date hereof between the Company and the grantees named therein, respectively.
"Reorganization Agreement" means the Reorganization Agreement to be entered
into by TCI, TCIC, the Company and certain other subsidiaries of TCI in
connection with the Distribution to provide for, among other things, the
principal corporate transactions required to effect the Distribution, the
conditions thereto and certain provisions governing the relationship between the
Company and TCI with respect to and resulting from the Distribution.
"TCIC" means TCI Communications, Inc., a Delaware corporation.
"TCI's Net Investment" means, as of any relevant date, the cumulative
amount invested by TCI and its predecessor (including their respective
subsidiaries other than the Company and its subsidiaries) in the Company, its
subsidiaries and the respective predecessors of the Company and its subsidiaries
prior to and including such date, less the aggregate amount of all dividends and
distributions made by the Company, its subsidiaries and the respective
predecessors of the Company and its subsidiaries to TCI and its predecessor
(including their respective subsidiaries other than the Company and its
subsidiaries) prior to and including such date.
19. Rules by Committee. The rights of Grantee and obligations of the
Company hereunder shall be subject to such reasonable rules and regulations as
the Committee may adopt from time to time hereafter.
9
<PAGE>
IN WITNESS WHEREOF, the Company and Grantee have caused this Agreement to
be duly executed and delivered as of the date first written above.
ATTEST: TCI SATELLITE ENTERTAINMENT, INC.
By:
- ---------------------- ---------------------------------
Assistant Secretary Name:
Title:
------------------------------------
Gary S. Howard
10
<PAGE>
Exhibit B to Agreement
dated as of November __,1996
TCI SATELLITE ENTERTAINMENT, INC.
Option to Purchase Common Stock
Designation of Beneficiary
I, ___________________________________________ (the "Grantee"), hereby
declare that upon my death __________________________________________ (the
Name
"Beneficiary") of
_____________________________________________________________________________,
Street Address City State Zip Code
who is my _________________________________________________, shall be entitled
Relationship to Grantee
to the Option and all other rights accorded Grantee by the above-referenced
grant agreement (the "Agreement").
It is understood that this Designation of Beneficiary is made pursuant to
the Agreement and is subject to the conditions stated herein, including the
Beneficiary's survival of Grantee's death. If any such condition is not
satisfied, such rights shall devolve according to Grantee's will or the laws of
descent and distribution.
All prior designations of beneficiary under the Agreement are hereby
revoked. This Designation of Beneficiary may only be revoked in writing, signed
by Grantee, and filed with Tele-Communications, Inc. and TCI Satellite
Entertainment, Inc., prior to Grantee's death.
_____________________________ _________________________________________
Date Grantee
<PAGE>
Exhibit 10.8
------------
TCI SATELLITE ENTERTAINMENT, INC.
Option to Purchase Series A Common Stock
THIS AGREEMENT ("Agreement") is made as of the ____ day of November, 1996,
by and between TCI SATELLITE ENTERTAINMENT, INC., a Delaware
corporation (the "Company"), and Larry E. Romrell ("Grantee").
Prior to the date hereof the Company has been a subsidiary of Tele-
Communications, Inc., a Delaware corporation ("TCI"), and a member of the TCI
Group, as defined in TCI's annual report on Form 10-K for the fiscal year ended
December 31, 1995. In consideration for services performed by Grantee for the
benefit of TCI and its Subsidiaries and affiliates, including, without
limitation, services for the benefit of the Company and its predecessors, and to
encourage Grantee to remain in the employ of TCI and its Subsidiaries, the Board
of Directors of TCI (the "TCI Board"), with the approval of the Compensation
Committee of the TCI Board (the "TCI Committee"), and the Board of Directors of
the Company ("Company Board") have determined to grant Grantee the rights and
option herein, on the terms and subject to the conditions set forth herein.
Capitalized terms used herein and not otherwise defined are defined in paragraph
18 hereof.
Accordingly, the Company and Grantee hereby agree as follows:
1. Grant of Option; Option Term. The Company hereby grants to Grantee the
right and option (the "Option"), on the terms and subject to the conditions set
forth herein, to purchase the Option Shares from the Company for a price per
Option Share equal to the Option Price. Subject to paragraph 2 hereof, the
Option shall be exercisable in whole at any time and in part from time to time
during the period commencing on the date hereof and expiring at 5:00 p.m.,
Denver, Colorado time ("Close of Business") on the tenth anniversary of the
Determination Date, or such earlier date as the Option may be terminated
pursuant to paragraph 6 hereof (the "Option Term").
2. Conditions of Exercise; Vesting. Except as otherwise provided in the
second to last sentence of this paragraph 2, the Option shall not be exercisable
until the first anniversary of the Determination Date, and, from the first
anniversary of the Determination Date to the fifth anniversary of the
Determination Date, the Option shall be exercisable only to the extent the
Option Shares have become available for purchase in accordance with the
following schedule:
<PAGE>
<TABLE>
<CAPTION>
Anniversary of Percentage of Option Shares
Determination Date Available for Purchase
- ------------------ -----------------------------
<S> <C>
1st 20%
2nd 40%
3rd 60%
4th 80%
5th 100%
</TABLE>
Notwithstanding the foregoing, all Option Shares shall become available for
purchase if during the Option Term (i) Grantee's employment with TCI and its
Subsidiaries shall terminate by reason of (x) termination by TCI or any
Subsidiary without Cause, (y) termination by Grantee for Good Reason or (z)
Disability, (ii) Grantee's employment shall terminate pursuant to provisions of
a written employment agreement, if any, between Grantee and TCI or any
Subsidiary which expressly permits Grantee to terminate such employment upon the
occurrence of specified events (other than the giving of notice and passage of
time) or (iii) Grantee dies while employed by TCI or a Subsidiary. Grantee
shall give the Company prompt written notice of any termination of Grantee's
employment with TCI and its Subsidiaries, and shall provide the Company with
such other information regarding the circumstances of such termination of
employment as the Company shall reasonably request, and shall cooperate with the
Company in good faith in connection with any reasonable investigation by the
Company relating to such termination of employment.
3. Manner of Exercise. The Option may be exercised only by delivering to
the Company all of the following and shall be considered exercised (as to the
number of shares specified in the notice referred to in clause (a) below) on the
later of (i) the first business day on which the Company has received all of the
following deliveries and (ii) the date of exercise designated in the written
notice referred to in clause (a) below (or if such date is not a business day,
the first business day thereafter):
(a) written notice, in such form as the Company Board may reasonably
require, stating that Grantee is exercising the Option and setting forth
the date of such exercise, the number of Option Shares to be purchased, the
aggregate purchase price to be paid for such Option Shares in accordance
with this Agreement and the manner in which such payment is being made;
(b) payment of the Option Price for each Option Share to be purchased
upon such exercise, in cash or in such other form or combination of forms
of payment contemplated by paragraph 10 hereof, together with payment of,
or other provision acceptable to the Company Board for, any and all
withholding taxes required to be withheld by the Company (or by TCI, if
applicable) upon such exercise, in accordance with paragraph 4 hereof; and
2
<PAGE>
(c) any other documentation that the Company Board may reasonably
require (including, without limitation, proof satisfactory to the Company
Board that the Option is then exercisable for the number of Option Shares
set forth in such notice).
4. Withholding for Taxes. It shall be a condition precedent to any
exercise of the Option that Grantee make provision acceptable to the Company
Board for the payment or withholding of any and all federal, state and local
taxes required to be withheld by the Company (or by TCI, if applicable) to
satisfy the tax liability associated with such exercise, as determined by the
Company Board.
5. Delivery by the Company. As soon as practicable after receipt of all
the items required by paragraph 3 hereof with respect to any exercise of the
Option, and subject to the withholding referred to in paragraph 4 hereof, the
Company shall deliver or cause to be delivered to Grantee certificates issued in
Grantee's name for the number of whole Option Shares purchased upon such
exercise. If delivery is by mail, delivery of Option Shares shall be deemed
effected for all purposes when a stock transfer agent of the Company shall have
deposited the certificates in the United States mail, addressed to the Grantee,
and any cash payment (for fractional shares or otherwise) shall be deemed
effected when a Company check, payable to Grantee and in an amount equal to the
amount of the cash payment, shall have been deposited in the United States mail,
addressed to Grantee, in each case in accordance with Section 12.
6. Early Termination of Option. Unless otherwise determined by the TCI
Committee in its sole discretion, by written notice to Grantee and the Company,
the Option shall terminate, prior to the expiration of the ten-year period
provided for in paragraph 1 hereof, as follows:
(a) If Grantee's employment with TCI and its Subsidiaries terminates
other than (i) by Grantee with Good Reason, (ii) by reason of Grantee's
death or Disability, (iii) with the written consent of TCI or the
applicable Subsidiary, (iv) without such consent if such termination is
pursuant to provisions of a written employment agreement, if any, between
the Grantee and TCI or the applicable Subsidiary which expressly permits
the Grantee to terminate such employment upon the occurrence of specified
events (other than the giving of notice and passage of time), or (v) by TCI
with or without Cause, then the Option shall terminate at the Close of
Business on the first business day following the expiration of the 90-day
period beginning on the date of termination of Grantee's employment;
(b) If Grantee dies while employed by TCI or one of its Subsidiaries,
or prior to the expiration of a relevant period of time during which the
Option remains exercisable as provided in this paragraph 6, the Option
shall terminate at the Close of Business on the first business day
following the expiration of the one-year period beginning on the date of
death;
(c) If Grantee's employment with TCI and its Subsidiaries terminates
by reason of Disability, then the Option shall terminate at the Close of
Business on the first business
3
<PAGE>
day following the expiration of the one-year period beginning on the date
of termination of Grantee's employment;
(d) If Grantee's employment with TCI and its Subsidiaries is
terminated by TCI or any Subsidiary for Cause, then the Option shall
terminate immediately upon such termination of Grantee's employment; and
(e) If Grantee terminates his employment with TCI and its Subsidiaries
(i) with Good Reason, (ii) with the written consent of TCI or the
applicable Subsidiary or (iii) pursuant to provisions of a written
employment agreement, if any, between Grantee and TCI or the applicable
Subsidiary which expressly permits the Grantee to terminate such employment
upon the occurrence of specified events (other than the giving of notice
and passage of time), or if TCI terminates Grantee's employment with TCI
and its Subsidiaries without Cause, then the Option Term shall not
terminate prior to the end of the ten-year period provided for in paragraph
1 hereof, except as otherwise provided in paragraph 6(b) above.
In any event in which the Option remains exercisable for a period of
time following the date of termination of Grantee's employment as provided
above, the Option may be exercised during such period of time only to the extent
it was exercisable as provided in paragraph 2 above on such date of termination
--------
of Grantee's employment. A change of employment is not a termination of
employment within the meaning of this paragraph 6, provided that, after giving
effect to such change, Grantee continues to be an employee of TCI or any
Subsidiary. Anything contained herein to the contrary notwithstanding, the
Option shall in any event terminate upon the expiration of the ten-year period
provided for in paragraph 1 hereof, if not theretofore terminated.
7. Nontransferability of Option. During Grantee's lifetime, the Option is
not and shall not be transferable (voluntarily or involuntarily) other than
pursuant to a Domestic Relations Order and, except as otherwise required
pursuant to a Domestic Relations Order, is exercisable only by Grantee or
Grantee's court appointed legal representative. Grantee may designate a
beneficiary or beneficiaries to whom the Option shall pass upon Grantee's death
and may change such designation from time to time by filing a written
designation of beneficiary or beneficiaries with the Company on the form annexed
hereto as Exhibit A or such other form as may be prescribed by the Company,
provided that no such designation shall be effective unless so filed prior to
the death of Grantee. If no such designation is made or if the designated
beneficiary does not survive Grantee's death, the Option shall pass by will or
the laws of descent and distribution. Following Grantee's death, the Option, if
otherwise exercisable, may be exercised by the person to whom the Option passes
according to the foregoing, and such person shall be deemed to be Grantee for
purposes of any applicable provisions of this Agreement.
8. No Shareholder Rights. Grantee shall not be deemed for any purpose to
be, or to have any of the rights of, a stockholder of the Company with respect
to any Option Shares unless and until such Option Shares have been issued to
Grantee by the Company. The existence of this
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<PAGE>
Agreement or the Option shall not affect in any way the right or power of the
Company or its stockholders to accomplish any corporate act.
9. Adjustments. (a) The Option shall be subject to adjustment (including,
without limitation, as to the number of Option Shares and the Option Price per
share) in the sole discretion of the Company Board and in such manner as the
Company Board may deem equitable and appropriate in connection with the
occurrence of any of the events described in Section 4.2 of the TCI Satellite
Entertainment, Inc. 1996 Stock Incentive Plan (the "Plan") following the
Determination Date; provided, however, that adjustments shall be made to the
-------- -------
Option if, and in the same manner that, adjustments are being made in connection
with the occurrence of any such event to any stock option granted under the
Plan. Adjustments to the Option Price shall be made on a per share basis so that
the aggregate remaining Option Price is unchanged.
(b) If the Distribution does not occur prior to the time that the
Option first becomes exercisable, the Option Price and Option Shares shall be
appropriately adjusted so that the Option shall be exercisable, in the
aggregate, for 1% of the issued and outstanding common equity of the Company
(after giving effect to the transactions contemplated by the Reorganization
Agreement other than the Distribution), for an aggregate purchase price equal to
1% of TCI's Net Investment as of the date the Option first becomes exercisable,
but excluding any portion of TCI's Net Investment that as of such date is
represented by a promissory note or other evidence of indebtedness from the
Company (or any of its subsidiaries) to TCI (or any Subsidiary of TCI).
10. Manner of Payment. The method or methods of payment of the Option Price
for the shares of Company Series A Common Stock to be purchased upon exercise of
the Option and any amounts required by paragraph 4 shall consist of (i) cash,
(ii) check, (iii) promissory note in such form as shall be acceptable to the
Company Board (except that this method of payment will not be available for
amounts required by paragraph 4), (iv) whole shares of Company Series A Common
Stock and/or Company Series B Common Stock already owned by Grantee, (v) the
withholding of shares of Company Series A Common Stock issuable upon exercise of
the Option, (vi) the delivery, together with a properly executed exercise
notice, of irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds required to pay the purchase price,
or (vii) any combination of the foregoing methods of payment, as Grantee may
elect and shall designate in the exercise notice provided for in paragraph 3
hereof, subject, however, to any restrictions or limitations of applicable law
or of any agreement evidencing indebtedness of the Company for borrowed money.
Any shares of capital stock delivered or withheld in payment of any amount due
hereunder shall be valued for such purposes at the Fair Market Value of such
shares on the applicable date of exercise of the Option.
11. Restrictions Imposed by Law. Grantee acknowledges that neither the
Option nor any of the Option Shares has been registered under the Securities Act
of 1933 and that the Option Shares may not be transferred in the absence of such
registration or the availability of an exemption therefrom under such Act or the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder. Neither the Company nor any other person shall have any obligation
to
5
<PAGE>
register any Option Shares, or any transfer of Option Shares, under the
Securities Act of 1933, the Securities Exchange Act of 1934 or any other state
or federal securities law. Certificates representing Option Shares purchased by
Grantee hereunder may bear such restrictive and other legends as counsel for the
Company shall require in order to insure compliance with any such law or any
rule or regulation promulgated thereunder. Grantee agrees that Grantee will not
exercise the Option (and that the Company shall not be obligated to deliver any
Option Shares upon any exercise of the Option) if counsel for the Company
determines that such exercise or delivery would violate any applicable law or
any rule or regulation of any governmental authority, or any rule or regulation
of, or agreement of the Company with, any securities exchange or association
upon which the Company Series A Common Stock is listed or quoted. The Company
shall in no event be obligated to take any affirmative action in order to cause
the exercise of the Option or the resulting delivery of the shares of Company
Series A Common Stock to comply with any such law, rule, regulation or
agreement.
12. Notice. Unless the Company notifies Grantee in writing of a change of
address, any notice or other communication to the Company with respect to this
Agreement shall be in writing and shall be delivered personally or sent by first
class mail, postage prepaid and addressed as follows
TCI Satellite Entertainment, Inc.
8085 South Chester, Suite 300
Englewood, Colorado 80112
Attention: General Counsel
Any notice or other communication by the Company to Grantee with respect to this
Agreement shall be in writing and shall be delivered personally, or shall be
sent by first class mail, postage prepaid, to Grantee's address as listed in the
records of the Company on the Determination Date, unless the Company has
received written notification from Grantee of a change of address. Except as
otherwise provided in paragraph 5, all notices and other communications
hereunder, including without limitation any notice of exercise, shall be
effective when actually received.
13. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware.
14. Construction. References in this Agreement to "this Agreement" and the
words "herein," "hereof," "hereunder" and similar terms refer to this Agreement,
including all Exhibits, as a whole, unless the context otherwise requires. The
headings of the paragraphs of this Agreement have been included for convenience
of reference only, are not to be considered a part hereof and shall not modify
or restrict any of the terms or provisions hereof. All decisions of the TCI
Committee and the Company Board, as applicable, upon questions regarding this
Agreement shall be conclusive.
6
<PAGE>
15. Duplicate Originals. The Company and Grantee may sign any number of
copies of this Agreement. Each signed copy shall be an original, but all of
them together represent the same agreement.
16. Entire Agreement. This Agreement is in satisfaction of and in lieu of
all prior discussions and agreements, oral or written, between or among TCI, the
Company and Grantee, or any of them with respect to the subject matter hereof.
Each of the Company and Grantee hereby declares and represents that no promise
or agreement not herein expressed has been made and that this Agreement contains
the entire agreement between and among the parties hereto with respect to the
Option and supersedes and makes null and void any prior agreements between or
among TCI, the Company and Grantee, or any of them, regarding the Option.
17. Amendment. This Agreement may be amended, modified or supplemented by
the Company, without the consent of the Grantee, (i) to cure any ambiguity or to
correct or supplement any provision herein which may be defective or
inconsistent with any other provision herein or (ii) to make such other changes
as the Company, upon advice of counsel, determines are necessary or advisable
because of the adoption or promulgation of, or change in or of the
interpretation of, any law or governmental rule or regulation, including,
without limitation, any applicable federal or state securities laws. Except as
provided above, this Agreement may be amended, modified or supplemented only by
written agreement of the parties hereto.
18. Definitions. As used in this Agreement, the following terms have the
corresponding meanings:
"Aggregate Option Price" means an amount equal to one percent (1%) of
TCI's Net Investment as of the first to occur of the date of the Distribution
and the date on which the Option first becomes exercisable, but excluding any
portion of TCI's Net Investment that as of such date is represented by a
promissory note or other evidence of indebtedness from the Company (or any of
its subsidiaries) to TCI (or any subsidiary of TCI).
"Cause" has the meaning ascribed thereto in any employment agreement
between Grantee and TCI or any of its Subsidiaries, and in the absence of any
such employment agreement means insubordination, dishonesty, incompetence, moral
turpitude, other misconduct of any kind, or refusal to perform one's duties and
responsibilities for any reason other than illness or incapacity, or negligence
in the performance of any of one's material duties or responsibilities that
continues after written notice from the Company, as determined conclusively by
the TCI Committee.
"Company Series A Common Stock" means the Series A Common Stock, $1.00
par value per share, of the Company.
"Company Series B Common Stock" means the Series B Common Stock, $1.00
par value per share, of the Company.
"Determination Date" means February 1, 1996.
7
<PAGE>
"Disability" means the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
that (a) can be expected to result in death or (b) has lasted or can be expected
to last for a continuous period of not less than 12 months.
"Distribution" means the proposed distribution by TCI, in a transaction
intended to be a tax-free spin-off, of all the issued and outstanding shares of
capital stock of the Company to the holders of shares of Tele-Communications,
Inc. Series A TCI Group Common Stock and Tele-Communications, Inc. Series B TCI
Group Common Stock.
"Domestic Relations Order" means a domestic relations order as defined by
the Internal Revenue Code of 1986, as amended, or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder.
"Fair Market Value" of a share of Company Series A Common Stock or Company
Series B Common Stock on any day means the last sale price (or, if no last sale
price is reported, the average of the high bid and low asked prices) for a share
of such series on such day (or, if such day is not a trading day, on the next
preceding trading day) as reported on NASDAQ or, if not reported on NASDAQ, as
quoted by the National Quotation Bureau Incorporated, or if such series is
listed on an exchange, on the principal exchange on which such series is listed.
If for any day the Fair Market Value of a share of any Company Series A Common
Stock or Company Series B Common Stock is not determinable by any of the
foregoing means, then the Fair Market Value for such day shall be determined in
good faith by the Company Board on the basis of such quotations and other
considerations as the Company Board deems appropriate.
"Good Reason" means the occurrence of any of the following prior to any
termination of employment by Grantee:
(i) any reduction in Grantee's annual rate of salary;
(ii) a failure by TCI to continue in effect any employee benefit plan in
which Grantee was participating, or the taking of any action by TCI that would
adversely affect Grantee's participation in, or materially reduce Grantee's
benefits under, any such employee benefit plan, unless such failure or such
taking of any action adversely affects the senior members of the corporate
management of TCI generally; or
(iii) the assignment to Grantee of duties and responsibilities that are
materially more oppressive or onerous than those attendant to Grantee's
position on the Determination Date.
"NASDAQ" means the Nasdaq Stock Market.
8
<PAGE>
"Option Price" means an amount per Option Share equal to the quotient of
(i) the Aggregate Option Price divided by (ii) the total number of Option Shares
on the date of the Distribution, immediately after giving effect thereto, as
such amount per Option Share may be adjusted from time to time after the
Distribution pursuant to paragraph 9 hereof. Within five business days after
the date of the Distribution, the Company shall give Grantee written notice of
the Option Price as of the date of the Distribution, which notice shall be
conclusive absent manifest error.
"Option Shares" means an aggregate number of shares of Company Series A
Common Stock equal to one percent (1%) of the total number of shares of Company
Series A Common Stock and Company Series B Common Stock issued and outstanding
on the date of the Distribution, immediately after giving effect thereto.
Within five business days after the date of the Distribution, the Company shall
give Grantee written notice of the aggregate number of the Option Shares as of
the date of the Distribution, which notice shall be conclusive absent manifest
error.
"Other Options" means the options to purchase shares of Company Series A
Common Stock granted pursuant to those other Option Agreements dated as of the
date hereof between the Company and the grantees named therein, respectively.
"Reorganization Agreement" means the Reorganization Agreement to be entered
into by TCI, TCIC, the Company and certain other subsidiaries of TCI in
connection with the Distribution to provide for, among other things, the
principal corporate transactions required to effect the Distribution, the
conditions thereto and certain provisions governing the relationship between the
Company and TCI with respect to and resulting from the Distribution.
"Subsidiary" of TCI means any present or future subsidiary (as defined in
Section 424(f) of the Code) of TCI or any business entity in which TCI owns,
directly or indirectly, 50% or more of the voting, capital or profits interests.
An entity shall be deemed a subsidiary of TCI for purposes of this definition
only for such periods as the requisite ownership or control relationship is
maintained.
"TCIC" means TCI Communications, Inc., a Delaware corporation.
"TCI's Net Investment" means, as of any relevant date, the cumulative
amount invested by TCI and its predecessor (including their respective
subsidiaries other than the Company and its subsidiaries) in the Company, its
subsidiaries and the respective predecessors of the Company and its subsidiaries
prior to and including such date, less the aggregate amount of all dividends and
distributions made by the Company, its subsidiaries and the respective
predecessors of the Company and its subsidiaries to TCI and its predecessor
(including their respective subsidiaries other than the Company and its
subsidiaries) prior to and including such date.
9
<PAGE>
IN WITNESS WHEREOF, the Company and Grantee have caused this Agreement to
be duly executed and delivered as of the date first written above.
ATTEST: TCI SATELLITE ENTERTAINMENT, INC.
By:
- ----------------------- --------------------------------
Assistant Secretary Name:
Title:
------------------------------------
[Grantee]
10
<PAGE>
Exhibit A to Agreement
dated as of November __, 1996
TCI SATELLITE ENTERTAINMENT, INC.
Option to Purchase Common Stock
Designation of Beneficiary
I, ___________________________________________ (the "Grantee"), hereby
declare that upon my death __________________________________________ (the
Name
"Beneficiary") of
_____________________________________________________________________________,
Street Address City State Zip Code
who is my _________________________________________________, shall be entitled
Relationship to Grantee
to the Option and all other rights accorded Grantee by the above-referenced
grant agreement (the "Agreement").
It is understood that this Designation of Beneficiary is made pursuant to
the Agreement and is subject to the conditions stated herein, including the
Beneficiary's survival of Grantee's death. If any such condition is not
satisfied, such rights shall devolve according to Grantee's will or the laws of
descent and distribution.
All prior designations of beneficiary under the Agreement are hereby
revoked. This Designation of Beneficiary may only be revoked in writing, signed
by Grantee, and filed with Tele-Communications, Inc. and TCI Satellite
Entertainment, Inc., prior to Grantee's death.
- --------------------------------- -----------------------------------------
Date Grantee
<PAGE>
Exhibit 10.9
------------
TCI SATELLITE ENTERTAINMENT, INC.
Option to Purchase Series A Common Stock
THIS AGREEMENT ("Agreement") is made as of the __ day of November 1996,
by and between TCI SATELLITE ENTERTAINMENT, INC., a Delaware corporation (the
"Company"), and Brendan R. Clouston ("Grantee").
Prior to the date hereof the Company has been a subsidiary of Tele-
Communications, Inc., a Delaware corporation ("TCI"), and a member of the TCI
Group, as defined in TCI's annual report on Form 10-K for the fiscal year ended
December 31, 1995. In consideration for services performed by Grantee for the
benefit of TCI and its Subsidiaries and affiliates, including, without
limitation, services for the benefit of the Company and its predecessors, and to
encourage Grantee to remain in the employ of TCI and its Subsidiaries, the Board
of Directors of TCI (the "TCI Board"), with the approval of the Compensation
Committee of the TCI Board (the "TCI Committee"), and the Board of Directors of
the Company ("Company Board") have determined to grant Grantee the rights and
option herein, on the terms and subject to the conditions set forth herein.
Capitalized terms used herein and not otherwise defined are defined in paragraph
18 hereof.
Accordingly, the Company and Grantee hereby agree as follows:
1. Grant of Option; Option Term. The Company hereby grants to Grantee the
right and option (the "Option"), on the terms and subject to the conditions set
forth herein, to purchase the Option Shares from the Company for a price per
Option Share equal to the Option Price. Subject to paragraph 2 hereof, the
Option shall be exercisable in whole at any time and in part from time to time
during the period commencing on the date hereof and expiring at 5:00 p.m.,
Denver, Colorado time ("Close of Business") on the tenth anniversary of the
Determination Date, or such earlier date as the Option may be terminated
pursuant to paragraph 6 hereof (the "Option Term").
2. Conditions of Exercise; Vesting. Except as otherwise provided in the
second to last sentence of this paragraph 2, the Option shall not be exercisable
until the first anniversary of the Determination Date, and, from the first
anniversary of the Determination Date to the fifth anniversary of the
Determination Date, the Option shall be exercisable only to the extent the
Option Shares have become available for purchase in accordance with the
following schedule:
<PAGE>
<TABLE>
<CAPTION>
Anniversary of Percentage of Option Shares
Determination Date Available for Purchase
------------------ ----------------------------
<S> <C>
1st 20%
2nd 40%
3rd 60%
4th 80%
5th 100%
</TABLE>
Notwithstanding the foregoing, all Option Shares shall become available for
purchase if during the Option Term (i) Grantee's employment with TCI and its
Subsidiaries shall terminate by reason of (x) termination by TCI or any
Subsidiary without Cause, (y) termination by Grantee for Good Reason or (z)
Disability, (ii) Grantee's employment shall terminate pursuant to provisions of
a written employment agreement, if any, between Grantee and TCI or any
Subsidiary which expressly permits Grantee to terminate such employment upon the
occurrence of specified events (other than the giving of notice and passage of
time) or (iii) Grantee dies while employed by TCI or a Subsidiary. Grantee
shall give the Company prompt written notice of any termination of Grantee's
employment with TCI and its Subsidiaries, and shall provide the Company with
such other information regarding the circumstances of such termination of
employment as the Company shall reasonably request, and shall cooperate with the
Company in good faith in connection with any reasonable investigation by the
Company relating to such termination of employment.
3. Manner of Exercise. The Option may be exercised only by delivering to
the Company all of the following and shall be considered exercised (as to the
number of shares specified in the notice referred to in clause (a) below) on the
later of (i) the first business day on which the Company has received all of the
following deliveries and (ii) the date of exercise designated in the written
notice referred to in clause (a) below (or if such date is not a business day,
the first business day thereafter):
(a) written notice, in such form as the Company Board may reasonably
require, stating that Grantee is exercising the Option and setting forth the
date of such exercise, the number of Option Shares to be purchased, the
aggregate purchase price to be paid for such Option Shares in accordance
with this Agreement and the manner in which such payment is being made;
(b) payment of the Option Price for each Option Share to be purchased
upon such exercise, in cash or in such other form or combination of forms of
payment contemplated by paragraph 10 hereof, together with payment of, or
other provision acceptable to the Company Board for, any and all withholding
taxes required to be withheld by the Company (or by TCI, if applicable) upon
such exercise, in accordance with paragraph 4 hereof; and
2
<PAGE>
(c) any other documentation that the Company Board may reasonably
require (including, without limitation, proof satisfactory to the Company
Board that the Option is then exercisable for the number of Option Shares
set forth in such notice).
4. Withholding for Taxes. It shall be a condition precedent to any
exercise of the Option that Grantee make provision acceptable to the Company
Board for the payment or withholding of any and all federal, state and local
taxes required to be withheld by the Company (or by TCI, if applicable) to
satisfy the tax liability associated with such exercise, as determined by the
Company Board.
5. Delivery by the Company. As soon as practicable after receipt of all
the items required by paragraph 3 hereof with respect to any exercise of the
Option, and subject to the withholding referred to in paragraph 4 hereof, the
Company shall deliver or cause to be delivered to Grantee certificates issued in
Grantee's name for the number of whole Option Shares purchased upon such
exercise. If delivery is by mail, delivery of Option Shares shall be deemed
effected for all purposes when a stock transfer agent of the Company shall have
deposited the certificates in the United States mail, addressed to the Grantee,
and any cash payment (for fractional shares or otherwise) shall be deemed
effected when a Company check, payable to Grantee and in an amount equal to the
amount of the cash payment, shall have been deposited in the United States mail,
addressed to Grantee, in each case in accordance with Section 12.
6. Early Termination of Option. Unless otherwise determined by the TCI
Committee in its sole discretion, by written notice to Grantee and the Company,
the Option shall terminate, prior to the expiration of the ten-year period
provided for in paragraph 1 hereof, as follows:
(a) If Grantee's employment with TCI and its Subsidiaries terminates
other than (i) by Grantee with Good Reason, (ii) by reason of Grantee's
death or Disability, (iii) with the written consent of TCI or the applicable
Subsidiary, (iv) without such consent if such termination is pursuant to
provisions of a written employment agreement, if any, between the Grantee
and TCI or the applicable Subsidiary which expressly permits the Grantee to
terminate such employment upon the occurrence of specified events (other
than the giving of notice and passage of time), or (v) by TCI with or
without Cause, then the Option shall terminate at the Close of Business on
the first business day following the expiration of the 90-day period
beginning on the date of termination of Grantee's employment;
(b) If Grantee dies while employed by TCI or one of its Subsidiaries,
or prior to the expiration of a relevant period of time during which the
Option remains exercisable as provided in this paragraph 6, the Option shall
terminate at the Close of Business on the first business day following the
expiration of the one-year period beginning on the date of death;
(c) If Grantee's employment with TCI and its Subsidiaries terminates by
reason of Disability, then the Option shall terminate at the Close of
Business on the first business
3
<PAGE>
day following the expiration of the one-year period beginning on the date of
termination of Grantee's employment;
(d) If Grantee's employment with TCI and its Subsidiaries is terminated
by TCI or any Subsidiary for Cause, then the Option shall terminate
immediately upon such termination of Grantee's employment; and
(e) If Grantee terminates his employment with TCI and its Subsidiaries
(i) with Good Reason, (ii) with the written consent of TCI or the applicable
Subsidiary or (iii) pursuant to provisions of a written employment
agreement, if any, between Grantee and TCI or the applicable Subsidiary
which expressly permits the Grantee to terminate such employment upon the
occurrence of specified events (other than the giving of notice and passage
of time), or if TCI terminates Grantee's employment with TCI and its
Subsidiaries without Cause, then the Option Term shall not terminate prior
to the end of the ten-year period provided for in paragraph 1 hereof, except
as otherwise provided in paragraph 6(b) above.
In any event in which the Option remains exercisable for a period of
time following the date of termination of Grantee's employment as provided
above, the Option may be exercised during such period of time only to the extent
it was exercisable as provided in paragraph 2 above on such date of termination
of Grantee's employment. A change of employment is not a termination of
employment within the meaning of this paragraph 6, provided that, after giving
--------
effect to such change, Grantee continues to be an employee of TCI or any
Subsidiary. Anything contained herein to the contrary notwithstanding, the
Option shall in any event terminate upon the expiration of the ten-year period
provided for in paragraph 1 hereof, if not theretofore terminated.
7. Nontransferability of Option. During Grantee's lifetime, the Option is
not and shall not be transferable (voluntarily or involuntarily) other than
pursuant to a Domestic Relations Order and, except as otherwise required
pursuant to a Domestic Relations Order, is exercisable only by Grantee or
Grantee's court appointed legal representative. Grantee may designate a
beneficiary or beneficiaries to whom the Option shall pass upon Grantee's death
and may change such designation from time to time by filing a written
designation of beneficiary or beneficiaries with the Company on the form annexed
hereto as Exhibit A or such other form as may be prescribed by the Company,
provided that no such designation shall be effective unless so filed prior to
the death of Grantee. If no such designation is made or if the designated
beneficiary does not survive Grantee's death, the Option shall pass by will or
the laws of descent and distribution. Following Grantee's death, the Option, if
otherwise exercisable, may be exercised by the person to whom the Option passes
according to the foregoing, and such person shall be deemed to be Grantee for
purposes of any applicable provisions of this Agreement.
8. No Shareholder Rights. Grantee shall not be deemed for any purpose to
be, or to have any of the rights of, a stockholder of the Company with respect
to any Option Shares unless and until such Option Shares have been issued to
Grantee by the Company. The existence of this
4
<PAGE>
Agreement or the Option shall not affect in any way the right or power of the
Company or its stockholders to accomplish any corporate act.
9. Adjustments. (a) The Option shall be subject to adjustment (including,
without limitation, as to the number of Option Shares and the Option Price per
share) in the sole discretion of the Company Board and in such manner as the
Company Board may deem equitable and appropriate in connection with the
occurrence of any of the events described in Section 4.2 of the TCI Satellite
Entertainment, Inc. 1996 Stock Incentive Plan (the "Plan") following the
Determination Date; provided, however, that adjustments shall be made to the
-------- -------
Option if, and in the same manner that, adjustments are being made in connection
with the occurrence of any such event to any stock option granted under the
Plan. Adjustments to the Option Price shall be made on a per share basis so that
the aggregate remaining Option Price is unchanged.
(b) If the Distribution does not occur prior to the time that the Option
first becomes exercisable, the Option Price and Option Shares shall be
appropriately adjusted so that the Option shall be exercisable, in the
aggregate, for 1% of the issued and outstanding common equity of the Company
(after giving effect to the transactions contemplated by the Reorganization
Agreement other than the Distribution), for an aggregate purchase price equal to
1% of TCI's Net Investment as of the date the Option first becomes exercisable,
but excluding any portion of TCI's Net Investment that as of such date is
represented by a promissory note or other evidence of indebtedness from the
Company (or any of its subsidiaries) to TCI (or any Subsidiary of TCI).
10. Manner of Payment. The method or methods of payment of the Option Price
for the shares of Company Series A Common Stock to be purchased upon exercise of
the Option and any amounts required by paragraph 4 shall consist of (i) cash,
(ii) check, (iii) promissory note in such form as shall be acceptable to the
Company Board (except that this method of payment will not be available for
amounts required by paragraph 4), (iv) whole shares of Company Series A Common
Stock and/or Company Series B Common Stock already owned by Grantee, (v) the
withholding of shares of Company Series A Common Stock issuable upon exercise of
the Option, (vi) the delivery, together with a properly executed exercise
notice, of irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds required to pay the purchase price,
or (vii) any combination of the foregoing methods of payment, as Grantee may
elect and shall designate in the exercise notice provided for in paragraph 3
hereof, subject, however, to any restrictions or limitations of applicable law
or of any agreement evidencing indebtedness of the Company for borrowed money.
Any shares of capital stock delivered or withheld in payment of any amount due
hereunder shall be valued for such purposes at the Fair Market Value of such
shares on the applicable date of exercise of the Option.
11. Restrictions Imposed by Law. Grantee acknowledges that neither the
Option nor any of the Option Shares has been registered under the Securities Act
of 1933 and that the Option Shares may not be transferred in the absence of such
registration or the availability of an exemption therefrom under such Act or the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder. Neither the Company nor any other person shall have any obligation
to
5
<PAGE>
register any Option Shares, or any transfer of Option Shares, under the
Securities Act of 1933, the Securities Exchange Act of 1934 or any other state
or federal securities law. Certificates representing Option Shares purchased by
Grantee hereunder may bear such restrictive and other legends as counsel for the
Company shall require in order to insure compliance with any such law or any
rule or regulation promulgated thereunder. Grantee agrees that Grantee will not
exercise the Option (and that the Company shall not be obligated to deliver any
Option Shares upon any exercise of the Option) if counsel for the Company
determines that such exercise or delivery would violate any applicable law or
any rule or regulation of any governmental authority, or any rule or regulation
of, or agreement of the Company with, any securities exchange or association
upon which the Company Series A Common Stock is listed or quoted. The Company
shall in no event be obligated to take any affirmative action in order to cause
the exercise of the Option or the resulting delivery of the shares of Company
Series A Common Stock to comply with any such law, rule, regulation or
agreement.
12. Notice. Unless the Company notifies Grantee in writing of a change of
address, any notice or other communication to the Company with respect to this
Agreement shall be in writing and shall be delivered personally or sent by first
class mail, postage prepaid and addressed as follows
TCI Satellite Entertainment, Inc.
8085 South Chester, Suite 300
Englewood, Colorado 80112
Attention: General Counsel
Any notice or other communication by the Company to Grantee with respect to this
Agreement shall be in writing and shall be delivered personally, or shall be
sent by first class mail, postage prepaid, to Grantee's address as listed in the
records of the Company on the Determination Date, unless the Company has
received written notification from Grantee of a change of address. Except as
otherwise provided in paragraph 5, all notices and other communications
hereunder, including without limitation any notice of exercise, shall be
effective when actually received.
13. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware.
14. Construction. References in this Agreement to "this Agreement" and the
words "herein," "hereof," "hereunder" and similar terms refer to this Agreement,
including all Exhibits, as a whole, unless the context otherwise requires. The
headings of the paragraphs of this Agreement have been included for convenience
of reference only, are not to be considered a part hereof and shall not modify
or restrict any of the terms or provisions hereof. All decisions of the TCI
Committee and the Company Board, as applicable, upon questions regarding this
Agreement shall be conclusive.
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15. Duplicate Originals. The Company and Grantee may sign any number of
copies of this Agreement. Each signed copy shall be an original, but all of
them together represent the same agreement.
16. Entire Agreement. This Agreement is in satisfaction of and in lieu of
all prior discussions and agreements, oral or written, between or among TCI, the
Company and Grantee, or any of them with respect to the subject matter hereof.
Each of the Company and Grantee hereby declares and represents that no promise
or agreement not herein expressed has been made and that this Agreement contains
the entire agreement between and among the parties hereto with respect to the
Option and supersedes and makes null and void any prior agreements between or
among TCI, the Company and Grantee, or any of them, regarding the Option.
17. Amendment. This Agreement may be amended, modified or supplemented by
the Company, without the consent of the Grantee, (i) to cure any ambiguity or to
correct or supplement any provision herein which may be defective or
inconsistent with any other provision herein or (ii) to make such other changes
as the Company, upon advice of counsel, determines are necessary or advisable
because of the adoption or promulgation of, or change in or of the
interpretation of, any law or governmental rule or regulation, including,
without limitation, any applicable federal or state securities laws. Except as
provided above, this Agreement may be amended, modified or supplemented only by
written agreement of the parties hereto.
18. Definitions. As used in this Agreement, the following terms have the
corresponding meanings:
"Aggregate Option Price" means an amount equal to one percent (1%) of
TCI's Net Investment as of the first to occur of the date of the Distribution
and the date on which the Option first becomes exercisable, but excluding any
portion of TCI's Net Investment that as of such date is represented by a
promissory note or other evidence of indebtedness from the Company (or any of
its subsidiaries) to TCI (or any subsidiary of TCI).
"Cause" has the meaning ascribed thereto in any employment agreement
between Grantee and TCI or any of its Subsidiaries, and in the absence of any
such employment agreement means insubordination, dishonesty, incompetence, moral
turpitude, other misconduct of any kind, or refusal to perform one's duties and
responsibilities for any reason other than illness or incapacity, or negligence
in the performance of any of one's material duties or responsibilities that
continues after written notice from the Company, as determined conclusively by
the TCI Committee.
"Company Series A Common Stock" means the Series A Common Stock, $1.00
par value per share, of the Company.
"Company Series B Common Stock" means the Series B Common Stock, $1.00
par value per share, of the Company.
"Determination Date" means February 1, 1996.
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<PAGE>
"Disability" means the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
that (a) can be expected to result in death or (b) has lasted or can be expected
to last for a continuous period of not less than 12 months.
"Distribution" means the proposed distribution by TCI, in a transaction
intended to be a tax-free spin-off, of all the issued and outstanding shares of
capital stock of the Company to the holders of shares of Tele-Communications,
Inc. Series A TCI Group Common Stock and Tele-Communications, Inc. Series B TCI
Group Common Stock.
"Domestic Relations Order" means a domestic relations order as defined
by the Internal Revenue Code of 1986, as amended, or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder.
"Fair Market Value" of a share of Company Series A Common Stock or
Company Series B Common Stock on any day means the last sale price (or, if no
last sale price is reported, the average of the high bid and low asked prices)
for a share of such series on such day (or, if such day is not a trading day, on
the next preceding trading day) as reported on NASDAQ or, if not reported on
NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if such
series is listed on an exchange, on the principal exchange on which such series
is listed. If for any day the Fair Market Value of a share of any Company Series
A Common Stock or Company Series B Common Stock is not determinable by any of
the foregoing means, then the Fair Market Value for such day shall be determined
in good faith by the Company Board on the basis of such quotations and other
considerations as the Company Board deems appropriate.
"Good Reason" means the occurrence of any of the following prior to any
termination of employment by Grantee:
(i) any reduction in Grantee's annual rate of salary;
(ii) a failure by TCI to continue in effect any employee benefit plan in
which Grantee was participating, or the taking of any action by TCI that would
adversely affect Grantee's participation in, or materially reduce Grantee's
benefits under, any such employee benefit plan, unless such failure or such
taking of any action adversely affects the senior members of the corporate
management of TCI generally; or
(iii) the assignment to Grantee of duties and responsibilities that are
materially more oppressive or onerous than those attendant to Grantee's
position on the Determination Date.
"NASDAQ" means the Nasdaq Stock Market.
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<PAGE>
"Option Price" means an amount per Option Share equal to the quotient of
(i) the Aggregate Option Price divided by (ii) the total number of Option Shares
on the date of the Distribution, immediately after giving effect thereto, as
such amount per Option Share may be adjusted from time to time after the
Distribution pursuant to paragraph 9 hereof. Within five business days after
the date of the Distribution, the Company shall give Grantee written notice of
the Option Price as of the date of the Distribution, which notice shall be
conclusive absent manifest error.
"Option Shares" means an aggregate number of shares of Company Series A
Common Stock equal to one percent (1%) of the total number of shares of Company
Series A Common Stock and Company Series B Common Stock issued and outstanding
on the date of the Distribution, immediately after giving effect thereto.
Within five business days after the date of the Distribution, the Company shall
give Grantee written notice of the aggregate number of the Option Shares as of
the date of the Distribution, which notice shall be conclusive absent manifest
error.
"Other Options" means the options to purchase shares of Company Series A
Common Stock granted pursuant to those other Option Agreements dated as of the
date hereof between the Company and the grantees named therein, respectively.
"Reorganization Agreement" means the Reorganization Agreement to be entered
into by TCI, TCIC, the Company and certain other subsidiaries of TCI in
connection with the Distribution to provide for, among other things, the
principal corporate transactions required to effect the Distribution, the
conditions thereto and certain provisions governing the relationship between the
Company and TCI with respect to and resulting from the Distribution.
"Subsidiary" of TCI means any present or future subsidiary (as defined in
Section 424(f) of the Code) of TCI or any business entity in which TCI owns,
directly or indirectly, 50% or more of the voting, capital or profits interests.
An entity shall be deemed a subsidiary of TCI for purposes of this definition
only for such periods as the requisite ownership or control relationship is
maintained.
"TCIC" means TCI Communications, Inc., a Delaware corporation.
"TCI's Net Investment" means, as of any relevant date, the cumulative
amount invested by TCI and its predecessor (including their respective
subsidiaries other than the Company and its subsidiaries) in the Company, its
subsidiaries and the respective predecessors of the Company and its subsidiaries
prior to and including such date, less the aggregate amount of all dividends and
distributions made by the Company, its subsidiaries and the respective
predecessors of the Company and its subsidiaries to TCI and its predecessor
(including their respective subsidiaries other than the Company and its
subsidiaries) prior to and including such date.
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<PAGE>
IN WITNESS WHEREOF, the Company and Grantee have caused this Agreement to
be duly executed and delivered as of the date first written above.
ATTEST: TCI SATELLITE ENTERTAINMENT, INC.
_________________________ By:_________________________________
Assistant Secretary Name:
Title:
_______________________________________
[Grantee]
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<PAGE>
Exhibit A to Agreement
dated as of November __, 1996
TCI SATELLITE ENTERTAINMENT, INC.
Option to Purchase Common Stock
Designation of Beneficiary
I, _____________________________________ (the "Grantee"), hereby declare
that upon my death ___________________________________ (the "Beneficiary") of
Name
_____________________________________________________________________________,
Street Address City State Zip Code
who is my __________________________________________, shall be entitled to the
Relationship to Grantee
Option and all other rights accorded Grantee by the above-referenced grant
agreement (the "Agreement").
It is understood that this Designation of Beneficiary is made pursuant to
the Agreement and is subject to the conditions stated herein, including the
Beneficiary's survival of Grantee's death. If any such condition is not
satisfied, such rights shall devolve according to Grantee's will or the laws of
descent and distribution.
All prior designations of beneficiary under the Agreement are hereby
revoked. This Designation of Beneficiary may only be revoked in writing, signed
by Grantee, and filed with Tele-Communications, Inc. and TCI Satellite
Entertainment, Inc., prior to Grantee's death.
_______________________________ _____________________________________
Date Grantee
<PAGE>
Exhibit 10.10
-------------
TCI SATELLITE ENTERTAINMENT, INC.
Option to Purchase Series A Common Stock
THIS AGREEMENT ("Agreement") is made as of the __ day of November,
1996, by and between TCI SATELLITE ENTERTAINMENT, INC., a Delaware corporation
(the "Company"), and David P. Beddow ("Grantee").
Prior to the date hereof the Company has been a subsidiary of Tele-
Communications, Inc., a Delaware corporation ("TCI"), and a member of the TCI
Group, as defined in TCI's annual report on Form 10-K for the fiscal year ended
December 31, 1995. In consideration for services performed by Grantee for the
benefit of TCI and its Subsidiaries and affiliates, including, without
limitation, services for the benefit of the Company and its predecessors, and to
encourage Grantee to remain in the employ of TCI and its Subsidiaries, the Board
of Directors of TCI (the "TCI Board"), with the approval of the Compensation
Committee of the TCI Board (the "TCI Committee"), and the Board of Directors of
the Company ("Company Board") have determined to grant Grantee the rights and
option herein, on the terms and subject to the conditions set forth herein.
Capitalized terms used herein and not otherwise defined are defined in paragraph
18 hereof.
Accordingly, the Company and Grantee hereby agree as follows:
1. Grant of Option; Option Term. The Company hereby grants to Grantee the
right and option (the "Option"), on the terms and subject to the conditions set
forth herein, to purchase the Option Shares from the Company for a price per
Option Share equal to the Option Price. Subject to paragraph 2 hereof, the
Option shall be exercisable in whole at any time and in part from time to time
during the period commencing on the date hereof and expiring at 5:00 p.m.,
Denver, Colorado time ("Close of Business") on the tenth anniversary of the
Determination Date, or such earlier date as the Option may be terminated
pursuant to paragraph 6 hereof (the "Option Term").
2. Conditions of Exercise; Vesting. Except as otherwise provided in the
second to last sentence of this paragraph 2, the Option shall not be exercisable
until the first anniversary of the Determination Date, and, from the first
anniversary of the Detrmination Date to the fifth anniversary of the
Determination Date, the Option shall be exercisable only to the extent the
Option Shares have become available for purchase in accordance with the
following schedule:
<PAGE>
Anniversary of Percentage of Option Shares
Determination Date Available for Purchase
------------------ -------------------------------
1st 20%
2nd 40%
3rd 60%
4th 80%
5th 100%
Notwithstanding the foregoing, all Option Shares shall become available for
purchase if during the Option Term (i) Grantee's employment with TCI and its
Subsidiaries shall terminate by reason of (x) termination by TCI or any
Subsidiary without Cause, (y) termination by Grantee for Good Reason or (z)
Disability, (ii) Grantee's employment shall terminate pursuant to provisions of
a written employment agreement, if any, between Grantee and TCI or any
Subsidiary which expressly permits Grantee to terminate such employment upon the
occurrence of specified events (other than the giving of notice and passage of
time) or (iii) Grantee dies while employed by TCI or a Subsidiary. Grantee
shall give the Company prompt written notice of any termination of Grantee's
employment with TCI and its Subsidiaries, and shall provide the Company with
such other information regarding the circumstances of such termination of
employment as the Company shall reasonably request, and shall cooperate with the
Company in good faith in connection with any reasonable investigation by the
Company relating to such termination of employment.
3. Manner of Exercise. The Option may be exercised only by delivering to
the Company all of the following and shall be considered exercised (as to the
number of shares specified in the notice referred to in clause (a) below) on the
later of (i) the first business day on which the Company has received all of the
following deliveries and (ii) the date of exercise designated in the written
notice referred to in clause (a) below (or if such date is not a business day,
the first business day thereafter):
(a) written notice, in such form as the Company Board may reasonably
require, stating that Grantee is exercising the Option and setting forth
the date of such exercise, the number of Option Shares to be purchased, the
aggregate purchase price to be paid for such Option Shares in accordance
with this Agreement and the manner in which such payment is being made;
(b) payment of the Option Price for each Option Share to be purchased
upon such exercise, in cash or in such other form or combination of forms
of payment contemplated by paragraph 10 hereof, together with payment of,
or other provision acceptable to the Company Board for, any and all
withholding taxes required to be withheld by the Company (or by TCI, if
applicable) upon such exercise, in accordance with paragraph 4 hereof; and
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<PAGE>
(c) any other documentation that the Company Board may reasonably
require (including, without limitation, proof satisfactory to the Company
Board that the Option is then exercisable for the number of Option Shares
set forth in such notice).
4. Withholding for Taxes. It shall be a condition precedent to any
exercise of the Option that Grantee make provision acceptable to the Company
Board for the payment or withholding of any and all federal, state and local
taxes required to be withheld by the Company (or by TCI, if applicable) to
satisfy the tax liability associated with such exercise, as determined by the
Company Board.
5. Delivery by the Company. As soon as practicable after receipt of all
the items required by paragraph 3 hereof with respect to any exercise of the
Option, and subject to the withholding referred to in paragraph 4 hereof, the
Company shall deliver or cause to be delivered to Grantee certificates issued in
Grantee's name for the number of whole Option Shares purchased upon such
exercise. If delivery is by mail, delivery of Option Shares shall be deemed
effected for all purposes when a stock transfer agent of the Company shall have
deposited the certificates in the United States mail, addressed to the Grantee,
and any cash payment (for fractional shares or otherwise) shall be deemed
effected when a Company check, payable to Grantee and in an amount equal to the
amount of the cash payment, shall have been deposited in the United States mail,
addressed to Grantee, in each case in accordance with Section 12.
6. Early Termination of Option. Unless otherwise determined by the TCI
Committee in its sole discretion, by written notice to Grantee and the Company,
the Option shall terminate, prior to the expiration of the ten-year period
provided for in paragraph 1 hereof, as follows:
(a) If Grantee's employment with TCI and its Subsidiaries terminates
other than (i) by Grantee with Good Reason, (ii) by reason of Grantee's
death or Disability, (iii) with the written consent of TCI or the
applicable Subsidiary, (iv) without such consent if such termination is
pursuant to provisions of a written employment agreement, if any, between
the Grantee and TCI or the applicable Subsidiary which expressly permits
the Grantee to terminate such employment upon the occurrence of specified
events (other than the giving of notice and passage of time), or (v) by TCI
with or without Cause, then the Option shall terminate at the Close of
Business on the first business day following the expiration of the 90-day
period beginning on the date of termination of Grantee's employment;
(b) If Grantee dies while employed by TCI or one of its Subsidiaries,
or prior to the expiration of a relevant period of time during which the
Option remains exercisable as provided in this paragraph 6, the Option
shall terminate at the Close of Business on the first business day
following the expiration of the one-year period beginning on the date of
death;
(c) If Grantee's employment with TCI and its Subsidiaries terminates
by reason of Disability, then the Option shall terminate at the Close of
Business on the first business
3
<PAGE>
day following the expiration of the one-year period beginning on the date
of termination of Grantee's employment;
(d) If Grantee's employment with TCI and its Subsidiaries is
terminated by TCI or any Subsidiary for Cause, then the Option shall
terminate immediately upon such termination of Grantee's employment; and
(e) If Grantee terminates his employment with TCI and its Subsidiaries
(i) with Good Reason, (ii) with the written consent of TCI or the
applicable Subsidiary or (iii) pursuant to provisions of a written
employment agreement, if any, between Grantee and TCI or the applicable
Subsidiary which expressly permits the Grantee to terminate such employment
upon the occurrence of specified events (other than the giving of notice
and passage of time), or if TCI terminates Grantee's employment with TCI
and its Subsidiaries without Cause, then the Option Term shall not
terminate prior to the end of the ten-year period provided for in paragraph
1 hereof, except as otherwise provided in paragraph 6(b) above.
In any event in which the Option remains exercisable for a period of
time following the date of termination of Grantee's employment as provided
above, the Option may be exercised during such period of time only to the extent
it was exercisable as provided in paragraph 2 above on such date of termination
of Grantee's employment. A change of employment is not a termination of
employment within the meaning of this paragraph 6, provided that, after giving
--------
effect to change, Grantee continues to be an employee of TCI or any
Subsidiary. Anything contained herein to the contrary notwithstanding, the
Option shall in any event terminate upon the expiration of the ten-year period
provided for in paragraph 1 hereof, if not theretofore terminated.
7. Nontransferability of Option. During Grantee's lifetime, the Option is
not and shall not be transferable (voluntarily or involuntarily) other than
pursuant to a Domestic Relations Order and, except as otherwise required
pursuant to a Domestic Relations Order, is exercisable only by Grantee or
Grantee's court appointed legal representative. Grantee may designate a
beneficiary or beneficiaries to whom the Option shall pass upon Grantee's death
and may change such designation from time to time by filing a written
designation of beneficiary or beneficiaries with the Company on the form annexed
hereto as Exhibit A or such other form as may be prescribed by the Company,
provided that no such designation shall be effective unless so filed prior to
the death of Grantee. If no such designation is made or if the designated
beneficiary does not survive Grantee's death, the Option shall pass by will or
the laws of descent and distribution. Following Grantee's death, the Option, if
otherwise exercisable, may be exercised by the person to whom the Option passes
according to the foregoing, and such person shall be deemed to be Grantee for
purposes of any applicable provisions of this Agreement.
8. No Shareholder Rights. Grantee shall not be deemed for any purpose to
be, or to have any of the rights of, a stockholder of the Company with respect
to any Option Shares unless and until such Option Shares have been issued to
Grantee by the Company. The existence of this
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<PAGE>
Agreement or the Option shall not affect in any way the right or power of the
Company or its stockholders to accomplish any corporate act.
9. Adjustments. (a) The Option shall be subject to adjustment (including,
without limitation, as to the number of Option Shares and the Option Price per
share) in the sole discretion of the Company Board and in such manner as the
Company Board may deem equitable and appropriate in connection with the
occurrence of any of the events described in Section 4.2 of the TCI Satellite
Entertainment, Inc. 1996 Stock Incentive Plan (the "Plan") following the
Determination Date; provided, however, that adjustments shall be made to the
-------- -------
Option if, and in the same manner that, adjustments are being made in connection
with the occurrence of any such event to any stock option granted under the
Plan. Adjustments to the Option Price shall be made on a per share basis so that
the aggregate remaining Option Price is unchanged.
(b) If the Distribution does not occur prior to the time that the
Option first becomes exercisable, the Option Price and Option Shares shall be
appropriately adjusted so that the Option shall be exercisable, in the
aggregate, for 1/2% of the issued and outstanding common equity of the Company
(after giving effect to the transactions contemplated by the Reorganization
Agreement other than the Distribution), for an aggregate purchase price equal to
1/2% of TCI's Net Investment as of the date the Option first becomes
exercisable, but excluding any portion of TCI's Net Investment that as of such
date is represented by a promissory note or other evidence of indebtedness from
the Company (or any of its subsidiaries) to TCI (or any Subsidiary of TCI).
10. Manner of Payment. The method or methods of payment of the Option Price
for the shares of Company Series A Common Stock to be purchased upon exercise of
the Option and any amounts required by paragraph 4 shall consist of (i) cash,
(ii) check, (iii) promissory note in such form as shall be acceptable to the
Company Board (except that this method of payment will not be available for
amounts required by paragraph 4), (iv) whole shares of Company Series A Common
Stock and/or Company Series B Common Stock already owned by Grantee, (v) the
withholding of shares of Company Series A Common Stock issuable upon exercise of
the Option, (vi) the delivery, together with a properly executed exercise
notice, of irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds required to pay the purchase price,
or (vii) any combination of the foregoing methods of payment, as Grantee may
elect and shall designate in the exercise notice provided for in paragraph 3
hereof, subject, however, to any restrictions or limitations of applicable law
or of any agreement evidencing indebtedness of the Company for borrowed money.
Any shares of capital stock delivered or withheld in payment of any amount due
hereunder shall be valued for such purposes at the Fair Market Value of such
shares on the applicable date of exercise of the Option.
11. Restrictions Imposed by Law. Grantee acknowledges that neither the
Option nor any of the Option Shares has been registered under the Securities Act
of 1933 and that the Option Shares may not be transferred in the absence of such
registration or the availability of an exemption therefrom under such Act or the
rules and regulations of the Securities and Exchange Commission promulgated
thereunder. Neither the Company nor any other person shall have any obligation
to
5
<PAGE>
register any Option Shares, or any transfer of Option Shares, under the
Securities Act of 1933, the Securities Exchange Act of 1934 or any other state
or federal securities law. Certificates representing Option Shares purchased by
Grantee hereunder may bear such restrictive and other legends as counsel for the
Company shall require in order to insure compliance with any such law or any
rule or regulation promulgated thereunder. Grantee agrees that Grantee will not
exercise the Option (and that the Company shall not be obligated to deliver any
Option Shares upon any exercise of the Option) if counsel for the Company
determines that such exercise or delivery would violate any applicable law or
any rule or regulation of any governmental authority, or any rule or regulation
of, or agreement of the Company with, any securities exchange or association
upon which the Company Series A Common Stock is listed or quoted. The Company
shall in no event be obligated to take any affirmative action in order to cause
the exercise of the Option or the resulting delivery of the shares of Company
Series A Common Stock to comply with any such law, rule, regulation or
agreement.
12. Notice. Unless the Company notifies Grantee in writing of a change of
address, any notice or other communication to the Company with respect to this
Agreement shall be in writing and shall be delivered personally or sent by first
class mail, postage prepaid and addressed as follows
TCI Satellite Entertainment, Inc.
8085 South Chester, Suite 300
Englewood, Colorado 80112
Attention: General Counsel
Any notice or other communication by the Company to Grantee with respect to this
Agreement shall be in writing and shall be delivered personally, or shall be
sent by first class mail, postage prepaid, to Grantee's address as listed in the
records of the Company on the Determination Date, unless the Company has
received written notification from Grantee of a change of address. Except as
otherwise provided in paragraph 5, all notices and other communications
hereunder, including without limitation any notice of exercise, shall be
effective when actually received.
13. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware.
14. Construction. References in this Agreement to "this Agreement" and the
words "herein," "hereof," "hereunder" and similar terms refer to this Agreement,
including all Exhibits, as a whole, unless the context otherwise requires. The
headings of the paragraphs of this Agreement have been included for convenience
of reference only, are not to be considered a part hereof and shall not modify
or restrict any of the terms or provisions hereof. All decisions of the TCI
Committee and the Company Board, as applicable, upon questions regarding this
Agreement shall be conclusive.
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<PAGE>
15. Duplicate Originals. The Company and Grantee may sign any number of
copies of this Agreement. Each signed copy shall be an original, but all of them
together represent the same agreement.
16. Entire Agreement. This Agreement is in satisfaction of and in lieu of
all prior discussions and agreements, oral or written, between or among TCI, the
Company and Grantee, or any of them with respect to the subject matter hereof.
Each of the Company and Grantee hereby declares and represents that no promise
or agreement not herein expressed has been made and that this Agreement contains
the entire agreement between and among the parties hereto with respect to the
Option and supersedes and makes null and void any prior agreements between or
among TCI, the Company and Grantee, or any of them, regarding the Option.
17. Amendment. This Agreement may be amended, modified or supplemented by
the Company, without the consent of the Grantee, (i) to cure any ambiguity or to
correct or supplement any provision herein which may be defective or
inconsistent with any other provision herein or (ii) to make such other changes
as the Company, upon advice of counsel, determines are necessary or advisable
because of the adoption or promulgation of, or change in or of the
interpretation of, any law or governmental rule or regulation, including,
without limitation, any applicable federal or state securities laws. Except as
provided above, this Agreement may be amended, modified or supplemented only by
written agreement of the parties hereto.
18. Definitions. As used in this Agreement, the following terms have the
corresponding meanings:
"Aggregate Option Price" means an amount equal to one-half percent
(1/2%) of TCI's Net Investment as of the first to occur of the date of the
Distribution and the date on which the Option first becomes exercisable, but
excluding any portion of TCI's Net Investment that as of such date is
represented by a promissory note or other evidence of indebtedness from the
Company (or any of its subsidiaries) to TCI (or any subsidiary of TCI).
"Cause" has the meaning ascribed thereto in any employment agreement
between Grantee and TCI or any of its Subsidiaries, and in the absence of any
such employment agreement means insubordination, dishonesty, incompetence, moral
turpitude, other misconduct of any kind, or refusal to perform one's duties and
responsibilities for any reason other than illness or incapacity, or negligence
in the performance of any of one's material duties or responsibilities that
continues after written notice from the Company, as determined conclusively by
the TCI Committee.
"Company Series A Common Stock" means the Series A Common Stock, $1.00
par value per share, of the Company.
"Company Series B Common Stock" means the Series B Common Stock, $1.00
par value per share, of the Company.
"Determination Date" means February 1, 1996.
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<PAGE>
"Disability" means the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
that (a) can be expected to result in death or (b) has lasted or can be expected
to last for a continuous period of not less than 12 months.
"Distribution" means the proposed distribution by TCI, in a transaction
intended to be a tax-free spin-off, of all the issued and outstanding shares of
capital stock of the Company to the holders of shares of Tele-Communications,
Inc. Series A TCI Group Common Stock and Tele-Communications, Inc. Series B TCI
Group Common Stock.
"Domestic Relations Order" means a domestic relations order as defined
by the Internal Revenue Code of 1986, as amended, or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder.
"Fair Market Value" of a share of Company Series A Common Stock or
Company Series B Common Stock on any day means the last sale price (or, if no
last sale price is reported, the average of the high bid and low asked prices)
for a share of such series on such day (or, if such day is not a trading day, on
the next preceding trading day) as reported on NASDAQ or, if not reported on
NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if such
series is listed on an exchange, on the principal exchange on which such series
is listed. If for any day the Fair Market Value of a share of any Company Series
A Common Stock or Company Series B Common Stock is not determinable by any of
the foregoing means, then the Fair Market Value for such day shall be determined
in good faith by the Company Board on the basis of such quotations and other
considerations as the Company Board deems appropriate.
"Good Reason" means the occurrence of any of the following prior to any
termination of employment by Grantee:
(i) any reduction in Grantee's annual rate of salary;
(ii) a failure by TCI to continue in effect any employee benefit plan
in which Grantee was participating, or the taking of any action by TCI that
would adversely affect Grantee's participation in, or materially reduce
Grantee's benefits under, any such employee benefit plan, unless such
failure or such taking of any action adversely affects the senior members
of the corporate management of TCI generally; or
(iii) the assignment to Grantee of duties and responsibilities that are
materially more oppressive or onerous than those attendant to Grantee's
position on the Determination Date.
"NASDAQ" means the Nasdaq Stock Market.
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"Option Price" means an amount per Option Share equal to the quotient
of (i) the Aggregate Option Price divided by (ii) the total number of Option
Shares on the date of the Distribution, immediately after giving effect thereto,
as such amount per Option Share may be adjusted from time to time after the
Distribution pursuant to paragraph 9 hereof. Within five business days after the
date of the Distribution, the Company shall give Grantee written notice of the
Option Price as of the date of the Distribution, which notice shall be
conclusive absent manifest error.
"Option Shares" means an aggregate number of shares of Company Series A
Common Stock equal to one-half percent ( 1/2%) of the total number of shares of
Company Series A Common Stock and Company Series B Common Stock issued and
outstanding on the date of the Distribution, immediately after giving effect
thereto. Within five business days after the date of the Distribution, the
Company shall give Grantee written notice of the aggregate number of the Option
Shares as of the date of the Distribution, which notice shall be conclusive
absent manifest error.
"Other Options" means the options to purchase shares of Company Series
A Common Stock granted pursuant to those other Option Agreements dated as of the
date hereof between the Company and the grantees named therein, respectively.
"Reorganization Agreement" means the Reorganization Agreement to be
entered into by TCI, TCIC, the Company and certain other subsidiaries of TCI in
connection with the Distribution to provide for, among other things, the
principal corporate transactions required to effect the Distribution, the
conditions thereto and certain provisions governing the relationship between the
Company and TCI with respect to and resulting from the Distribution.
"Subsidiary" of TCI means any present or future subsidiary (as defined
in Section 424(f) of the Code) of TCI or any business entity in which TCI owns,
directly or indirectly, 50% or more of the voting, capital or profits interests.
An entity shall be deemed a subsidiary of TCI for purposes of this definition
only for such periods as the requisite ownership or control relationship is
maintained.
"TCIC" means TCI Communications, Inc., a Delaware corporation.
"TCI's Net Investment" means, as of any relevant date, the cumulative
amount invested by TCI and its predecessor (including their respective
subsidiaries other than the Company and its subsidiaries) in the Company, its
subsidiaries and the respective predecessors of the Company and its subsidiaries
prior to and including such date, less the aggregate amount of all dividends and
distributions made by the Company, its subsidiaries and the respective
predecessors of the Company and its subsidiaries to TCI and its predecessor
(including their respective subsidiaries other than the Company and its
subsidiaries) prior to and including such date.
9
<PAGE>
IN WITNESS WHEREOF, the Company and Grantee have caused this Agreement
to be duly executed and delivered as of the date first written above.
ATTEST: TCI SATELLITE ENTERTAINMENT, INC.
_________________________ By: _________________________________
Assistant Secretary Name:
Title:
_______________________________________
[Grantee]
10
<PAGE>
Exhibit A to Agreement
dated as of November __, 1996
TCI SATELLITE ENTERTAINMENT, INC.
Option to Purchase Common Stock
Designation of Beneficiary
I, ___________________________________________ (the "Grantee"), hereby
declare
that upon my death __________________________________________ (the
"Beneficiary") of Name
_____________________________________________________________________________,
Street Address City State Zip Code
who is my _________________________________________________, shall be entitled
Relationship to Grantee
to the
Option and all other rights accorded Grantee by the above-referenced grant
agreement (the "Agreement").
It is understood that this Designation of Beneficiary is made pursuant to
the Agreement and is subject to the conditions stated herein, including the
Beneficiary's survival of Grantee's death. If any such condition is not
satisfied, such rights shall devolve according to Grantee's will or the laws of
descent and distribution.
All prior designations of beneficiary under the Agreement are hereby
revoked. This Designation of Beneficiary may only be revoked in writing, signed
by Grantee, and filed with Tele-Communications, Inc. and TCI Satellite
Entertainment, Inc., prior to Grantee's death.
___________________________ ______________________________________________
Date Grantee
<PAGE>
Exhibit 10.11
1996 ANCILLARY AGREEMENT AMONG PARTNERS
THIS 1996 ANCILLARY AGREEMENT AMONG PARTNERS (this "Agreement"), dated
as of October 18, 1996, by and among Primestar Partners L.P., a Delaware limited
partnership ("Primestar") and the general and limited partners of Primestar
listed on the signature page hereof under the heading PARTICIPATING PARTNERS
(the "Participating Partners"), GE Americom Services, Inc., a Delaware
corporation ("GEA"), and its affiliate, GE American Communications, Inc., a
Delaware corporation ("GE"),
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Participating Partners and GEA are the general and
limited partners of Primestar, a Delaware limited partnership formed pursuant to
the Limited Partnership Agreement, dated February 8, 1990, as amended (the
"Partnership Agreement"); and
WHEREAS, Primestar and GE propose to enter into an Amended and
Restated Memorandum of Agreement (as the same may be amended from time to time,
the "MOA") and, as provided in the MOA, a Service Agreement (as the same may be
amended from time to time, the "Service Agreement") pursuant to which GE will
provide, and Primestar will take, transponder service on the communications
satellite denominated as GE-2 and potentially other GE satellites, which
Primestar intends to use to provide services to its subscribers; and
WHEREAS, GE's willingness to enter into the MOA and the Service
Agreement and to provide transponder service pursuant thereto depends in
material part on (i) the execution and delivery of a proposed Addendum Regarding
Letters of Credit (herein such Addendum (including all schedules, exhibits and
annexes thereto), as the same may be amended or modified from time to time, is
referred to as the "LC Addendum") to be made and effective as of the ____ day of
October, 1996, by GE and Primestar and (ii) the issuance for the benefit of GE
of Letters of Credit in the Required LC Amount (as those terms are defined in
the LC Addendum) to be in effect at the times specified in the LC Addendum; and
WHEREAS, the LC Addendum contemplates that Primestar may (i) provide
Primestar Primary LC's (as herein defined) for its own account to be issued for
the benefit of GE in the Required LC
<PAGE>
Amount or (ii) cause each Participating Partner to arrange for Partner Primary
LC's (as herein defined) to be issued for the account of such Participating
Partner or one or more of its affiliates in the amounts from time to time which
are the product of (a) the Letter of Credit Percentage set forth opposite its
name on Schedule 1 to the LC Addendum and (b) the Required LC Amount or (iii)
provide a combination of Primestar Primary LC's and Partner Primary LC's in an
aggregate amount not less than the Required LC Amount; and
WHEREAS, in order for Primestar to provide Primestar Primary LC's, it
may be necessary for each Participating Partner to provide, for the benefit of
the issuer of a Primestar Primary LC, a Secondary LC (as herein defined) to be
issued for the account of such Participating Partner or one or more of its
affiliates; and
WHEREAS, the Participating Partners and such affiliates (for the
account of which there may be issued either Partner Primary LC's or Secondary
LC's), through their direct and indirect ownership interests in Primestar,
expect to derive substantial benefits from the MOA and the Service Agreement;
and
WHEREAS, the willingness of the Participating Partners to arrange for
such Partner Primary LC's or Secondary LC's is conditioned upon the execution
and delivery of this Agreement;
NOW, THEREFORE, the parties hereto, in consideration of the foregoing
and the mutual covenants hereinafter set forth, agree as follows:
1. Definitions. As used in this Agreement, the following terms
-----------
shall have the following respective meanings:
A. "Affiliate" shall have the meaning specified in the Partnership
Agreement.
B. "Collateral Account" shall mean the GE Collateral Account or the
Secondary LC Collateral Account, as the case may be.
C. "GE Collateral Account" shall mean the cash collateral account
referred to in Section 2D of the LC Addendum, together with any
related accounts, documents and agreements.
D. "Letter of Credit" shall have the meaning specified in the LC
Addendum, and shall
-2-
<PAGE>
not include a Secondary LC.
E. "Letter of Credit Expiration Draw" means (i) with respect to a
Primestar Primary LC or a Partner Primary LC, any draw pursuant to
clause (a) of the third sentence of Article 2D of the LC Addendum
and (ii) with respect to a Secondary LC, any draw, pursuant to the
terms of a related Primestar Primary LC Reimbursement Agreement,
which results from no replacement letter of credit having been
issued for such Secondary LC within the period prior to expiration
of such Secondary LC which is specified in the condition to such
draw.
F. "Letter of Credit Payment Draw" means with respect to a Primestar
Primary LC or a Partner Primary LC, any draw under such Letter of
Credit other than a draw pursuant to Section 2D of the LC
Addendum.
G. "Letter of Credit Rating Decline Draw" means (i) with respect to a
Primestar Primary LC or a Partner Primary LC, any draw under such
Letter of Credit pursuant to clause (b) of the third sentence of
Article 2D of the LC Addendum and (ii) with respect to a Secondary
LC, any draw pursuant to the terms of a related Primestar Primary
LC Reimbursement Agreement which results from the failure of the
issuer of such Secondary LC to maintain a required rating
specified in the condition to such draw.
H. "Non-Recourse Advance" means an advance by a Participating Partner
to Primestar contemplated by the provisions of Section 5.06 of the
Partnership Agreement which is a recourse obligation of Primestar
only and not a recourse obligation of any partner of Primestar or
any other person, as contemplated by Section 4 of the form of note
attached as Exhibit I to the Partnership Agreement.
I. "Participating Partner Notes" means any
-3-
<PAGE>
notes issued by Primestar pursuant to the provisions of this
Agreement.
J. "Partners Committee" shall have the meaning specified in the
Partnership Agreement.
K. "Partnership Interests" shall have the meaning specified in the
Partnership Agreement.
L. "Partner Primary LC" means a Letter of Credit issued for the
account of a Participating Partner or one of its Affiliates and
for the benefit of GE.
M. "Primestar Primary LC" means a Letter of Credit issued for the
account of Primestar and for the benefit of GE.
N. "Primestar Primary LC Reimbursement Agreement" means an agreement
pursuant to which Primestar is obligated to reimburse the issuer
of a Primestar Primary LC for draws thereon.
O. "Required LC Amount" shall have the meaning specified in the LC
Addendum.
P. "Responsible Participating Partner" means, with respect to a
particular letter of credit, the Participating Partner for whose
account the letter of credit is issued. For this purpose, a
letter of credit issued for the account of one or more Affiliates
of such Participating Partner shall be deemed to have been issued
for the account of such Participating Partner.
Q. "Secondary LC" means a letter of credit issued for the account of
a Participating Partner or one or more of its Affiliates and for
the benefit of the issuer of a Primestar Primary LC and issued in
connection with a Primestar Primary LC Reimbursement Agreement.
R. "Secondary LC Collateral Account" shall mean a cash collateral
account (and related accounts, documents and agreements)
-4-
<PAGE>
established in connection with a Primestar Primary LC
Reimbursement Agreement for the purpose of receiving deposits of
proceeds of draws on Secondary LC's which are not immediately
applied to the payment of reimbursement obligations owing by
Primestar under such Reimbursement Agreement but which rather are
to be held as collateral security for the payment of such
reimbursement obligations.
2. Letter of Credit Rating Decline Draw; Letter of Credit Expiration
-----------------------------------------------------------------
Draw. (A) In the event that there shall occur, with respect to a Partner
- ----
Primary LC or a Secondary LC, a Letter of Credit Rating Decline Draw or a Letter
of Credit Expiration Draw:
(i) such draw shall be deemed to be a Non-Recourse Advance (approved
by the Partners Committee) by the Responsible Participating
Partner in the amount of such draw, which Non-Recourse Advance
shall bear no interest for the first 90 days after the date of
such draw, repayable as follows:
(a) on the date on which any proceeds of such draw (and related
investments) are remitted to Primestar or its designee, an
aggregate amount of principal and interest on such Non-
Recourse Advance (to be applied first to accrued and unpaid
interest and thereafter to principal) up to the amount of
such proceeds (and related investments) shall be payable by
Primestar (any amount of such proceeds and investments in
excess of the principal of and interest accrued under the
stated terms of the note evidencing such Advance to be paid
as additional interest thereon); provided that, if any of
such proceeds are remitted to such Responsible Participating
Partner or one of its Affiliates (as the designee of
Primestar or otherwise), such remittance shall be deemed to
be a payment by Primestar on such Non-Recourse Advance and
shall be applied in accordance with the terms of this clause
(a);
-5-
<PAGE>
(b) subject to Section 4 hereof and Annex A hereto, on the date
60 days after the date on which any proceeds of such a draw
with respect to a Partner Primary LC (and related
investments) are withdrawn from the GE Collateral Account
and applied by GE together, if appropriate, with the
proceeds of one or more Letter of Credit Payment Draws to
amounts due under the MOA and Service Agreement, an
aggregate amount of principal and interest on such Non-
Recourse Advance (to be applied first to accrued and unpaid
interest and thereafter to principal) equal to the amount of
such proceeds (and related investments) so applied shall be
payable by Primestar (any amount of such proceeds and
investments in excess of the principal of and interest
accrued under the stated terms of the note evidencing such
Advance to be paid as additional interest thereon);
(c) subject to Section 4 hereof and Annex A hereto, on the date
60 days after the date on which any proceeds of such draw
with respect to a Secondary LC (and related investments) are
withdrawn from a Secondary LC Collateral Account and applied
(together, if appropriate, with the proceeds of one or more
contemporaneous draws on other Secondary LC's) to reimburse
an issuing bank for a Letter of Credit Payment Draw with
respect to a Primestar Primary LC, an aggregate amount of
principal and interest on such Non-Recourse Advance with
respect to such Secondary LC (to be applied first to accrued
and unpaid interest and thereafter to principal) equal to
the amount of such proceeds (and related investments) so
applied shall be payable by Primestar (any amount of such
proceeds and investments in excess of the principal of and
interest accrued under the stated terms of the note
evidencing such Advance to be paid as additional interest
thereon); and
(d) the balance, if any, shall be payable by Primestar as
specified in Section 2(B) hereof;
(ii) Primestar shall promptly issue to such Responsible Participating
Partner a note substantially in the form of Exhibit I to the
Partnership
-6-
<PAGE>
Agreement (modified to incorporate by reference the
relevant provisions of this Agreement including Annex A hereto)
payable to the order of such Responsible Participating Partner in
the principal amount of, and dated the date of, such draw; and
(iii) In the event that any proceeds of such draw (and/or related
investments) are available to be remitted to Primestar or its
designee at any time, under the terms of Article 2D of the LC
Addendum or any comparable terms of a related Primestar Primary
LC Reimbursement Agreement or Secondary LC Collateral Account
agreement, Primestar, upon the request to Primestar of any
Participating Partner, shall request that such amount be remitted
to such Responsible Participating Partner in accordance with the
LC Addendum or such Reimbursement Agreement or Secondary LC
Collateral Account agreement.
(B) In the event that there shall occur, with respect to a Primestar
Primary LC, a Letter of Credit Rating Decline Draw or a Letter of Credit
Expiration Draw, and such draw shall cause a draw on one or more Secondary LC's
and/or a withdrawal from a Secondary LC Collateral Account of any proceeds of a
Secondary LC draw (and related investments):
(i) such draw on each such Secondary LC shall be deemed to be a Non-
Recourse Advance (approved by the Partners Committee) by the
Responsible Participating Partner in the amount of such draw on
such Secondary LC, which Non-Recourse Advance shall bear no
interest for the first 90 days after the date of such draw, and
each such Non-Recourse Advance, and each Non-Recourses Advance
which (under Section 2(A)(i) hereof) is deemed to have been made
by the Responsible Participating Partner with respect to the
Secondary LC the proceeds of which are so withdrawn, shall be
repayable as follows:
(a) on the date on which any proceeds of such draw on such
Primestar Primary LC (and related investments) are remitted
to Primestar or its designee, an aggregate amount of
principal and interest on all such Non-Recourse Advances by
all such Responsible Participating Partners (to be applied
first to accrued and unpaid interest and thereafter to
principal) up to the amount of such proceeds (and related
investments) shall be payable by Primestar to all such
Responsible Participating Partners pro rata based on the
outstanding principal amounts of such Advances (any amount
of such proceeds and investments in excess of the principal
of and interest accrued under the stated terms of the notes
evidencing such Advances to be retained by Primestar); and
(b) subject to Section 4 hereof and Annex A hereto, on the date
60 days after the date on which any proceeds of such draw on
such
-7-
<PAGE>
Primestar Primary LC (and related investments) are
withdrawn from the GE Collateral Account and applied by
GE together, if appropriate, with the proceeds of one or
more Letter of Credit Payment Draws to amounts due under
the MOA and Service Agreement, an aggregate amount of
principal and interest on all such Non-Recourse Advances
by all such Responsible Participating Partners (to be
applied first to accrued and unpaid interest and
thereafter to principal) equal to the amount of such
proceeds (and related investments) so applied shall be
payable by Primestar to all such Responsible
Participating Partners pro rata based on the outstanding
principal amounts of such Advances (any amount of such
proceeds and investments in excess of the principal of
and interest accrued under the stated terms of the notes
evidencing such Advances to be retained by Primestar);
(ii) Primestar shall promptly issue to each such Responsible
Participating Partner which is deemed to have made a Non-
Recourse Advance in the amount of a draw on a Secondary LC
under the preceding clause (i) a note substantially in the
form of Exhibit I to the Partnership Agreement (modified to
incorporate by reference the relevant provisions of this
Agreement including Annex A hereto) payable to the order of
such Responsible Participating Partner in the principal
amount of, and dated the date of, such draw; and
(iii) In the event that any proceeds of such draw on such
Primestar Primary LC (and/or related investments) are
available to be remitted to Primestar or its designee at any
time under the terms of Article 2D of the LC Addendum,
Primestar, upon the request to Primestar of any
Participating Partner, shall request that such amount be
remitted to such Responsible Participating Partner in
accordance with the LC Addendum.
3. Letter of Credit Payment Draw. (A) In the event that there
-----------------------------
shall occur, with respect to a Partner Primary LC, a Letter of Credit Payment
Draw:
(i) such Letter of Credit Payment Draw shall be deemed to be a
Non-Recourse Advance
-8-
<PAGE>
(approved by the Partners Committee) by the Responsible
Participating Partner in the amount of such Letter of Credit
Payment Draw repayable by Primestar, subject to Section 4
hereof and Annex A hereto, 60 days after the date of such
Letter of Credit Payment Draw; and
(ii) Primestar shall promptly issue to such Responsible
Participating Partner a note substantially in the form of
Exhibit I to the Partnership Agreement (modified to
incorporate by reference the relevant provisions of this
Agreement including Annex A hereto) payable to the order of
such Responsible Participating Partner in the principal
amount of, and dated the date of, such Letter of Credit
Payment Draw.
(B) In the event that there shall occur, with respect to a
Primestar Primary LC, a Letter of Credit Payment Draw, and such draw shall cause
a draw on one or more Secondary LC's:
(i) such draw on each such Secondary LC shall be deemed to be a
Non-Recourse Advance (approved by the Partners Committee) by
the Responsible Participating Partner in the amount of such
draw repayable by Primestar (subject to Section 4 hereof and
Annex A hereto) 60 days after the date of such Letter of
Credit Payment Draw on such Primestar Primary LC; and
(ii) Primestar shall promptly issue to each such Responsible
Participating Partner a note substantially in the form of
Exhibit I to the Partnership Agreement (modified to
incorporate by reference the relevant provisions of this
Agreement including Annex A
-9-
<PAGE>
hereto) payable to the order of such Responsible
Participating Partner in the principal amount of such Non-
Recourse Advance and dated the date of such Letter of Credit
Payment Draw on such Primestar Primary LC.
4. Subordination of Participating Partner Advances to MOA/Service
--------------------------------------------------------------
Agreement Obligations. The obligations of Primestar to make payments to the
- ---------------------
Participating Partners in connection with the Non-Recourse Advances referred to
in Sections 2 and 3 hereof, shall be subordinate and subject in right of
payment, in the manner and to the extent set forth in Annex A hereto (which is
by reference incorporated in and made a part hereof), to the obligations of
Primestar to make payments to GE under the MOA and Service Agreement.
5. Rights of GE to Draw on Letters of Credit to Survive Primestar
--------------------------------------------------------------
Bankruptcy; Participating Partners Entitled to Benefit of GE Mitigation
- -----------------------------------------------------------------------
Obligation. Each of the Participating Partners acknowledges and agrees that if
- ----------
at any time the MOA, Service Agreement and/or LC Addendum shall have been
rejected or deemed rejected in any bankruptcy proceeding of Primestar, GE shall
be entitled to make draws under the Letters of Credit and withdrawals from the
GE Collateral Account in accordance with the terms of the LC Addendum (including
without limitation Article 3F thereof) as if such rejection or deemed rejection
had not occurred. GE, Primestar, and each of the Participating Partners agree
that any duty GE may have to Primestar, a Participating Partner or any affiliate
thereof to mitigate damages arising from any breach of the MOA, Service
Agreement or LC Addendum by Primestar (including but not limited to any breach
resulting from a rejection or deemed rejection) shall be limited to GE's
mitigation obligation as specified in Article 3F of the LC Addendum. GE further
agrees that such mitigation obligation shall run to the benefit of each
Participating Partner and each such affiliate.
6. Warranties of GE in Connection with Draws on Letters of Credit and
------------------------------------------------------------------
Withdrawals from GE Collateral Account. In connection with any draw by GE on a
- --------------------------------------
Letter of Credit issued for the account of Primestar, with respect to which
Primestar's reimbursement obligations are backed by Secondary LC's, guarantees
of Participating Partners (or their affiliates), and/or collateral pledged by
Participating Partners (or their affiliates), or for the account of a
Participating Partner (or an affiliate thereof) and in connection with any
withdrawal by GE from the GE Cash Collateral Account, GE makes the following
warranties to Primestar and each such Participating Partner (i) effective upon
presentment of its demand and drawing certificate or withdrawal notice, GE
-10-
<PAGE>
warrants that GE's presentation is not materially fraudulent and that honor of
such presentation would not facilitate a fraud by GE on the issuer of the
applicable Letter of Credit or on Primestar or such Participating Partner or its
affiliate for whose account the Letter of Credit was issued; and (ii) effective
at the time such Letter of Credit drawing or withdrawal of cash collateral is
honored, GE warrants that such drawing or withdrawal does not violate the
provisions of the LC Addendum. Except as provided in this Section 6, GE makes
no warranties of any kind hereunder to any Participating Partner in connection
with any draw by GE on any Letter of Credit or withdrawal by GE from the GE Cash
Collateral Account.
7. Partnership Agreement Amendment. If and to the extent that any
-------------------------------
provisions of this Agreement are inconsistent with any provision of the
Partnership Agreement, to the extent necessary to give effect to the terms and
interest of this Agreement, but only to such extent, the provisions of this
Agreement shall govern, and the conflicting provisions of the Partnership
Agreement shall be deemed amended accordingly.
8. Further Assurances. Each of the parties to this Agreement agrees
------------------
that at any time and from time to time upon written request of any other party,
it will execute and deliver such further documents and do such further acts and
things as such other party may reasonably request in order to effect the
purposes of this Agreement.
9. Miscellaneous. This Agreement may not be amended or modified in
-------------
any way, and none of the provisions herein may be waived, except in writing
signed (i) by an authorized representative of the party against which the
amendment, modification or waiver is sought to be enforced and (ii) in the case
of any amendment, modification or waiver which is in effect an amendment to the
Partnership Agreement, by the persons whose approval is then required under the
provisions of the Partnership Agreement to effect an amendment to the
Partnership Agreement; provided, however, that, unless GEA or GE, as the case
-------- -------
may be, would be adversely affected thereby, (a) any provision of this Agreement
except Sections 4, 5 and 6 and this Section 9, may be amended, modified or
waived without the consent of GE, (b) the consent of GEA shall not be required
for any amendment, modification or waiver of any provision of this Agreement
except Section 7 and clauses (b) and (c) of this Section 9 and (c) any provision
of this Agreement which is not inconsistent with any provision of the
Partnership Agreement may be amended or modified without the consent of GEA.
Any Participating Partner may assign all of its rights and obligations
under this Agreement in connection with the
-11-
<PAGE>
transfer of its entire Partnership Interest in accordance with the terms of the
Partnership Agreement, to the transferee or transferees of such Partnership
Interest, provided (x) any Partner Primary LC or Secondary LC issued for the
account of such Participating Partner or one or more of its Affiliates shall
have been replaced by a Partner Primary LC or Secondary LC, as the case may be,
issued for the account of such transferee or transferees, and such replacement
shall not have caused Primestar to fail to be in compliance with the LC Addendum
or a Primestar Primary LC Reimbursement Agreement, (y) in the event there has
been any draw under a Partner Primary LC or Secondary LC issued for the account
of such Participating Partner or one or more of its Affiliates, the
Participating Partner and such Affiliate(s) shall have irrevocably assigned to
the transferee or transferees or one or more of their Affiliates all of their
rights and obligations with respect to, or arising in connection with, all such
draws, including without limitation with respect to all Non-Recourse Advances
made or deemed to have been made by such Participating Partner under Section 2
or Section 3 of this Agreement which have not been repaid in accordance with the
terms of this Agreement (including Section 4 and Annex A) and all Participating
Partner Notes issued in connection therewith, any and all interest of the
Participating Partner and its affiliates in amounts held in any Collateral
Account, and any rights of the Participating Partner and its Affiliates under
Section 5 of this Agreement, and (z) such transferee or transferees shall have
executed and delivered to each other party hereto an instrument pursuant to
which each such transferee agrees to be bound by all of the terms of this
Agreement as an additional party hereto. Upon such an assignment of its rights
and obligations under this Agreement in accordance with the foregoing, such
Participating Partner shall be released from all obligations under this
Agreement. Subject to the foregoing, no party hereto shall assign this Agreement
or any part hereof without the prior written consent of the other parties.
Except as otherwise provided herein, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns (including, without limitation, successors and permitted
assigns of a Participating Partner's interest hereunder and in its Partnership
Interests and successors and permitted assigns of the interests of the
Participating Partner or its Affiliates in deemed Non-Recourse Advances).
-12-
<PAGE>
All notices, demands, requests, and other communications hereunder
shall be in writing and shall be given as specified in Section 13.02 of the
Partnership Agreement and, in the case of GE, to it at the following address
(fax number) or such other address (fax number) as GE may designate in writing:
Manager, Customer Contracts
GE American Communications, Inc.
Four Research Way
Princeton, New Jersey 08540-6684
Fax: (609) 987-4440
Phone: (609) 987-4325
with a copy to:
Vice President and General Counsel
GE American Communications, Inc.
Four Research Way
Princeton, New Jersey 08540-6684
Fax: (609) 987-4233
Phone: (609) 987-4013
Any waiver or failure to enforce any provision of this Agreement shall
not be construed as a continuing waiver.
If any provision of this Agreement or the application thereof to any
person or circumstances shall be invalid or unenforceable to any extent, the
remainder of this Agreement and the application of such provisions to other
persons or circumstances shall not be affected thereby and shall be enforced to
the fullest extent permitted by law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Delaware (without giving effect to its
choice of law principles.)
This Agreement may be executed in as many counterparts as may be
deemed necessary and convenient, and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument.
-11A-
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound,
have caused this Agreement to be executed by their duly authorized officers as
of the date first above written.
PRIMESTAR PARTNERS L.P.
By
-----------------------------
Name:
Title:
GE AMERICOM SERVICES, INC.
By
-----------------------------
Name:
Title:
GE AMERICAN COMMUNICATIONS, INC.
By
-----------------------------
Name:
Title:
PARTICIPATING PARTNERS
----------------------
COMCAST DBS, INC. TCI K-1, Inc.
By By
------------------------------- -----------------------------
Name: Name:
Title: Title:
CONTINENTAL SATELLITE TW PROGRAMMING CO.
COMPANY, INC.
By
By -----------------------------
------------------------------- a general partner
Name:
Title: By
-----------------------------
Name:
Title:
COX SATELLITE, INC.
UNITED ARTISTS K-1
-12-
<PAGE>
By INVESTMENTS, INC.
-------------------------------
Name:
Title:
By
-----------------------------
Name:
Title
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NEW VISION SATELLITE
By: NEWHOUSE SATELLITE, INC.,
a general partner
By
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Name:
Title:
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Exhibit 10.11.1
ANNEX A
SUBORDINATION OF PARTNER PAYMENT
SUPPORT ADVANCES TO MOA/SERVICE AGREEMENT OBLIGATIONS TO GE
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Section 1. Obligations for Partner Payment Support Advances Subordinated
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to MOA/Service Agreement Obligations to GE
------------------------------------------
Notwithstanding any other provision of the Agreement or the
Participating Partner Notes issued pursuant thereto, Primestar covenants and
agrees, and each Participating Partner and each other holder of any Subordinated
Obligations, by its acceptance thereof, likewise covenants and agrees that, to
the extent and in the manner hereinafter set forth in this Annex, the
Subordinated Obligations are hereby expressly made subordinate and subject in
right of payment to the prior payment in full of all Senior Obligations
(including Accrued Bankruptcy Interest).
For purposes of this Annex, the Senior Obligations shall not be deemed
to have been paid in full until all commitments and obligations of GE to provide
transponder services the payment for which would be Senior Obligations shall
have terminated and GE shall have received payment of all Senior Obligations.
Section 2. Payment Over of Proceeds Upon Dissolution, Etc.
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Except as otherwise provided in Section 7 and Section 8 hereof, in the
event of (a) any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, arrangement, relief, reorganization or other similar
case or proceeding in connection therewith, relative to Primestar or to its
creditors, as such, or to its assets, or (b) any liquidation, dissolution,
reorganization, arrangement, adjustment, protection, relief, composition or
winding up of Primestar or its debts, whether voluntary or involuntary and
whether or not involving insolvency or bankruptcy, or (c) any assignment for the
benefit of creditors or any other marshalling of assets and liabilities of
Primestar, then and in any such event the Holder of Senior Obligations shall be
entitled to receive payment in full in cash of all amounts due or to become due
on or in respect of all Senior Obligations before any direct or indirect payment
or distribution may be made on or in respect of the Subordinated Obligations,
and to that end the Holders of Senior Obligations shall be entitled to receive,
for application to the payment thereof, any payment or distribution of any kind
or character, whether in cash, property or securities which may be payable or
deliverable in respect of any Subordinated Obligations in any such case,
proceeding, dissolution,
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liquidation, reorganization, winding up or other event.
Section 3. Restrictions on Certain Payments Until Completion of Wellness
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Period
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Except as otherwise provided in Section 7 and Section 8 hereof, in the
event that there shall occur a Letter of Credit Payment Draw or a withdrawal
from the GE Collateral Account for the purpose of funding a payment to GE under
the MOA or Service Agreement, in either case in accordance with the terms of the
LC Addendum, thereafter no direct or indirect payment or distribution may be
made on or in respect of any Subordinated Obligations until there shall have
occurred subsequent to the last such draw or withdrawal a period of 120
consecutive days during which Primestar shall have paid in the ordinary course
of business all amounts due and owing by Primestar to all payees (including all
payments to GE under the MOA or Service Agreement but excluding payments on
Subordinated Obligations) which, in the ordinary course of business, would be
paid during such 120-day period.
Section 4. Payment Over of Certain Amounts
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In the event that, notwithstanding the provisions of Sections 2 and 3,
any holder of any Subordinated Obligations shall have received any payment or
distribution of any kind or character in respect of the Subordinated Obligations
at a time when such payment or distribution was prohibited by the provision of
Sections 2 and 3, then such payment or distribution shall be received and held
in trust for the benefit of and shall be immediately paid over to or for the
account of the Holders of Senior Obligations or their respective agents or
representatives (pro rata on the basis of the respective amount of Senior
Obligations held or represented by them) for application to or to be held as
collateral for the payment of all Senior Obligations until all Senior
Obligations due shall have been paid in full in cash, after giving effect to any
concurrent payment or distribution to or for any Holder of Senior Obligations;
provided that, at such time as such payment or distribution would no longer be
prohibited hereunder, pursuant to the terms of Section 3, 7, 8 or otherwise, any
amount so held as collateral at such time shall be immediately paid over to the
appropriate holder or holders of Subordinated Obligations.
Section 5. No Waiver of Subordination Provisions
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No right of any present or future Holder of any Senior Obligations to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of Primestar or
by any act or failure to act, in good faith, by any such Holder, or any non-
compliance
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by Primestar with the terms, provisions and covenants of the
Agreement, the Participating Partner Notes issued pursuant thereto or this
Annex, regardless of any knowledge thereof any such Holder may have or be
otherwise charged with.
Without in any way limiting the generality of the foregoing paragraph,
any Holders of Senior Obligations may, at any time and from time to time,
without the consent of or notice to any Participating Partner or any other
holder of Subordinated Obligations, without incurring responsibility to any
Participating Partner or any other holder of Subordinated Obligations and
without impairing or releasing the subordination provided in this Annex or the
obligations hereunder of any Participating Partner or any other holder of
Subordinated Obligations to the Holders of Senior Obligations, do any one or
more of the following: (a) change the manner, place or terms of payment or
extend the time of payment of, or renew, restructure or alter, Senior
Obligations, or otherwise amend or supplement in any manner Senior Obligations
or any instrument evidencing the same or any agreement under which Senior
Obligations are outstanding; (b) sell, exchange, release or otherwise deal with
any property pledged, mortgaged or otherwise securing Senior Obligations; (c)
release any Persons liable in any manner for the collection of Senior
Obligations; and (d) exercise or refrain from exercising any rights against
Primestar and any other Person. The terms of this Section 5 shall not be
construed to permit any Holder of Senior Obligations to take any action which it
is prohibited from taking under the terms of the LC Addendum, the Partnership
Agreement or the Agreement, as any thereof may be amended from time to time.
Section 6. Survival of Subordination Terms
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The provision of this Annex shall be effective or be reinstated, as
the case may be, if at any time any payment of any Senior Obligations is
rescinded or must otherwise be returned by any Holder of Senior Obligations upon
the insolvency, bankruptcy or reorganization of Primestar or otherwise, all as
though such payment had not been made.
Section 7. Limitation on Applicability of Subordination Terms
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Any provision of this Annex to the contrary notwithstanding, the
provisions of this Annex shall not apply to and shall not restrict in any manner
or to any extent any direct or indirect payment or distribution on or in respect
of Subordinated Obligations (a) in an amount which, when added to the amount of
all other payments and distributions permitted pursuant to this Section 7(a),
does not exceed the aggregate amount remitted to Primestar and its designees
pursuant to Section 2(A)(i)(a) or Section 2(B)(i)(a) of the Agreement and
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required by such Sections to be applied to payments on Non-Recourse Advances
(including payments deemed to be made by Primestar pursuant to the proviso at
the end of either of such Sections), or (b) in an amount which, when added to
the amount of all other payments and distributions permitted pursuant to this
Section 7(b), does not exceed the aggregate amount of Optional Letters of Credit
provided to GE (under Article 3B of the LC Addendum) at or prior to the time of
such payment or distribution.
Section 8. Termination of Subordination Terms When Senior Obligations
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Fully Covered by LC's and/or Cash
---------------------------------
Subject to reinstatement as provided in Section 6, the provisions of
this Annex shall terminate and cease to be effective at any time that the
aggregate amount of the Available Cash Collateral Amount and the Available
Letter of Credit Amount (as each such term is defined in the LC Addendum) equals
or exceeds the aggregate amount of monthly service fee payments at such time
scheduled to be made to GE over the remaining term of the MOA or Service
Agreement, as applicable.
Section 9. Definitions
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Capitalized terms used in and not defined in this Annex shall have the
meanings assigned in or pursuant to the Agreement to which this Annex is
attached. As used in this Annex, the following words and terms shall have the
following meanings, respectively, unless the context shall otherwise clearly
require:
"Accrued Bankruptcy Interest" means interest accruing subsequent to
any case or proceeding or dissolution, liquidation, reorganization, winding up
or other event referred to in Section 2(a), (b) or (c), in accordance with and
at the rate (including any rate applicable upon default) specified in the
instrument or agreement evidencing or governing the applicable Senior
Obligations, whether or not the claim for such interest is allowed as a claim in
connection with such case or proceeding or dissolution, liquidation,
reorganization, winding up or other event.
"Holder" means GE American Communications, Inc. and its successors and
assigns.
"Partner Payment Support Advances" means and includes all advances
made or deemed to have been made by the Participating Partners or any of them to
Primestar as provided in Section 2 or Section 3 of the Agreement.
"Subordinated Obligations" means all obligations of
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Primestar now or hereafter existing with respect to the principal of, interest
on, and all fees, costs, expenses and other amounts payable in respect of, all
Partner Payment Support Advances and all Participating Partner Notes and all
other notes and other documents, instruments and agreements executed by
Primestar in connection therewith, as the same may from time to time be amended,
extended, supplemented, restated, or otherwise modified, and all other
documents, instruments and agreements pursuant to which such obligations may be
refinanced, renewed or refunded by the Participating Partners, as such other
documents, instruments and agreements may from time to time be amended,
extended, supplemented, restated, or otherwise modified.
"Senior Obligations" means all obligations of Primestar now or
hereafter existing to make any payment of any kind or character (including
Accrued Bankruptcy Interest, if any) to GE, or to its successors or assigns,
under the terms of the MOA as in effect (including such terms relating to the
End-of-Life Option, if and when exercised) on the date of the Agreement to which
this Annex is attached (the "Original MOA") and the terms of the Service
Agreement to the extent, but only to the extent, that such terms give effect to
the terms of the Original MOA.
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<PAGE>
EXHIBIT 10.12
EQUIPMENT SALE AGREEMENT
BETWEEN
RESNET COMMUNICATIONS, INC.
AND
TCI SATELLITE ENTERTAINMENT, INC.
Dated as of October 21, 1996
<PAGE>
Page
RECITALS......................................................................1
AGREEMENT.....................................................................1
1. Sale of Equipment....................................................1
2. Payment..............................................................4
3. Term.................................................................4
4. Mutual Representations and Warranties................................4
5. Termination..........................................................4
6. Conditional Covenant to Continue Performance by TCI-Satellite........5
7. Notices..............................................................5
8. Assignment...........................................................6
9. Limitation of Liability..............................................6
10. Taxes................................................................7
11. Relationship of the Parties..........................................7
12. General..............................................................7
EXHIBIT A - EQUIPMENT AND PRICES
EXHIBIT B - EQUIPMENT STANDARDS FOR IRD'S
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EXECUTION COPY
EQUIPMENT SALE AGREEMENT
------------------------
This EQUIPMENT SALE AGREEMENT (including the Exhibits attached hereto, this
"Agreement") is entered into as of October 21, 1996, by and between TCI
Satellite Entertainment, Inc., a Delaware corporation ("TCI-Satellite"), and
ResNet Communications, Inc., a Delaware corporation ("ResNet") (each of TCI-
Satellite and ResNet being referred to herein individually as a "Party" and
together as the "Parties").
RECITALS
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A. ResNet operates as a "private cable operator" under applicable federal
law providing video on-demand, basic and premium cable television programming
and other interactive, multi-media entertainment and information services to
subscribers in multiple dwelling units with facilities that do not use any
public right-of-way (the "Business"). TCI-Satellite and ResNet desire to enter
into this Agreement to provide for the sale by TCI-Satellite to ResNet of
equipment necessary to decompress and decrypt programming signals delivered by
ResNet in connection with the Business.
AGREEMENT
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For good and valuable consideration, the receipt and sufficiency of which
is acknowledged, the Parties hereby agree as follows:
1. Sale of Equipment.
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(a) TCI-Satellite will sell to ResNet the integrated receiver-decoders
("IRD's"), low-noise block converters and other equipment specified on Exhibit A
to this Agreement (the "Equipment"). ResNet agrees that it will purchase all
Equipment of the type specified on Exhibit A that it requires in connection with
the Business up to a total purchase price of $40 million exclusively from TCI-
Satellite; provided that if TCI-Satellite is unable to supply any Equipment
within 30 days after receipt by TCI-Satellite of a purchase order from ResNet
for such Equipment in accordance with the terms of this Agreement, ResNet shall
have the right to obtain the Equipment from other sources and TCI-Satellite
shall permit ResNet to draw on the credit facility described in Section 1(b) to
pay the purchase price for the Equipment acquired by ResNet from other sources
but TCI-Satellite shall have no other liability for any failure to supply
Equipment hereunder. On the date of execution of this Agreement by the
Parties, ResNet is delivering to TCI-Satellite a purchase order for $5,396,053
in Equipment (the "Initial Purchase Order"). TCI-Satellite will deliver the
Equipment ordered pursuant to the Initial Purchase Order to ResNet in accordance
with ResNet's delivery instructions; provided, however, that TCI-Satellite will
not be obligated to deliver any Equipment sooner than 30 days after the date of
execution of this Agreement by the Parties unless the Parties mutually agree.
(b) The price payable by ResNet for the Equipment will be as specified
on Exhibit A. All prices set forth on Exhibit A are net of sales taxes and are
subject to change upon
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six months' prior notice by TCI-Satellite to ResNet based upon increases or
decreases in TCI-Satellite's actual cost for the Equipment. If TCI-Satellite's
cost for Equipment increases or decreases in the future, TCI-Satellite will
notify ResNet of such cost increase or decrease and the purchase prices for the
Equipment set forth on Exhibit A will be adjusted by multiplying the applicable
purchase price set forth on Exhibit A by a fraction the numerator of which is
TCI-Satellite's cost for such Equipment after any such future cost increase or
decrease and the denominator of which is TCI-Satellite's cost for such Equipment
immediately prior to any such future cost increase or decrease. The Parties
agree that a revised Exhibit A will be prepared and attached to this Agreement
to reflect any such price adjustments. The purchase price for the Equipment
purchased by ResNet pursuant to the Initial Purchase Order shall be payable in
cash net 30 days after delivery of each shipment of such Equipment to ResNet;
provided, however, that the full amount of $5,396,053, the purchase price for
the Equipment being purchased pursuant to the Initial Purchase Order, plus
applicable sales taxes, in any event shall be paid in full within six months
after the date of execution of this Agreement by the Parties. The purchase price
for the Equipment purchased by ResNet other than pursuant to the Initial
Purchase Order will be paid by drawing on a credit facility to be provided by
TCI-Satellite to ResNet pursuant to a Subordinated Convertible Term Loan
Agreement dated the same date as this Agreement (the "Loan Agreement"). The
purchase price for such Equipment will be deemed to have been advanced under the
Loan Agreement on the date of shipment of such Equipment by TCI-Satellite to
ResNet. ResNet will pay to TCI-Satellite all applicable sales taxes on the
Equipment in cash within 30 days after each shipment of such Equipment and
receipt of an invoice from TCI-Satellite specifying the amount of the applicable
sales taxes.
(c) TCI-Satellite will ship all Equipment (including any replacement
Equipment) to ResNet by such method of shipment as TCI-Satellite may select and
at TCI-Satellite's expense; provided, however, that ResNet will be responsible
for insuring the Equipment and will bear all risk of damage or loss to the
Equipment from the origin of shipment to the destination. ResNet will be
responsible for installing such Equipment at its own expense and for thereafter
maintaining such Equipment at its own expense.
(d) Equipment sold hereunder may be new from the manufacturer or may be
previously authorized. Equipment consisting of previously authorized IRD's will
be reconditioned in accordance with the standards set forth on Exhibit B to this
Agreement. For a period of 12 months from the date of delivery of a piece of
Equipment hereunder (including any replacement Equipment), TCI-Satellite or its
authorized service representatives will repair or replace (at its option) the
Equipment free of charge in the event of a defect in materials or workmanship.
ResNet will be responsible for shipping all Equipment (including any replacement
Equipment) to be repaired or replaced under warranty to TCI-Satellite's
designated location at ResNet's expense. TCI-Satellite will be entitled to
retain any Equipment replaced under warranty. TCI-Satellite may replace
defective Equipment with factory or refurbished parts, components, or the entire
unit, at TCI-Satellite's option. TCI-Satellite will decide without unreasonable
delay on the appropriate repair or replacement option with respect to any
defective Equipment covered by warranty. The warranty does not apply to any
appearance items of the Equipment that do not adversely affect the performance
of the Equipment. The warranty will not apply if the Equipment is damaged as a
result of (i) improper modification,
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alteration, maintenance, or repairs performed by anyone other than TCI-
Satellite's authorized service representatives; (ii) improper connection or
disconnection of the Equipment by anyone other than TCI-Satellite's authorized
service representatives; (iii) improper use of the Equipment; (iv) conditions
outside the control of TCI-Satellite; or (v) accident, abuse or neglect.
TCI-SATELLITE SHALL NOT BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES
RESULTING FROM THE USE OF THE EQUIPMENT OR ARISING OUT OF ANY BREACH OF THIS
WARRANTY. TCI-SATELLITE EXCLUDES AND DISCLAIMS ANY AND ALL OTHER EXPRESS OR
IMPLIED WARRANTIES, INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR
A PARTICULAR PURPOSE.
(e) ResNet has provided TCI-Satellite with a 12-month forecast estimating
its Equipment needs for the next 12 months and will provide TCI-Satellite with a
revised 12-month forecast on a quarterly basis. ResNet agrees that all
forecasts for Equipment needs delivered to TCI-Satellite will be estimated
Equipment needs determined on a commercially reasonable basis. ResNet agrees to
place orders for Equipment substantially in accordance with the most recent
forecast provided by ResNet to TCI-Satellite and at least 30 days prior to the
required delivery date. Notwithstanding the foregoing, ResNet will have the
right to deliver to TCI-Satellite, without regard to any forecast for Equipment
needs previously delivered by ResNet to TCI-Satellite, (i) a purchase order for
any Equipment required due to a Change in Technology as defined in the Signal
Availability Agreement being entered into by the Parties simultaneously with
this Agreement, and (ii) on any day during the 30-day period ending on the
maturity date of the Loan Agreement (including any extensions), a purchase order
for Equipment for a total purchase price equal to the difference between $40
million and the aggregate purchase price (net of sales taxes) of all Equipment
previously purchased by ResNet from TCI-Satellite, including Equipment purchased
pursuant to the Initial Purchase Order (the "Equipment Balance"). If TCI-
Satellite exercises its conversion option under the Loan Agreement prior to
ResNet's purchase of Equipment, including Equipment purchased pursuant to the
Initial Purchase Order, up to a total purchase price of $40 million of
Equipment, TCI-Satellite shall remain obligated to honor ResNet's purchase
orders in an aggregate amount up to the Equipment Balance for a period up to six
years from the date first above written without additional consideration payable
by ResNet with respect to the Equipment Balance other than the payment of
applicable sales taxes in accordance with the terms of this Agreement.
(f) ResNet will use the Equipment exclusively in connection with the
Business; provided, however, that ResNet may sell up to 5,000 IRD's and related
Equipment, or such greater amount of Equipment as may be approved by TCI-
Satellite in advance in writing, to ResNet's parent corporation, LodgeNet
Entertainment Corporation, a Delaware corporation, or its successor
("LodgeNet"), for a cash purchase price in an amount not less than the purchase
price paid hereunder by ResNet for such Equipment, solely for use by LodgeNet in
its business of providing video service to hotels, but only to hotels to which
LodgeNet provides service on the date first above written.
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2. Payment. Payments for the Equipment purchased pursuant to the Initial
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Purchase Order and for sales taxes on all Equipment required to be made by
ResNet hereunder shall be sent to TCI-Satellite, 8085 South Chester, Suite 300,
Englewood, CO 80112, Attention: Commercial Department or to such other address
as TCI-Satellite may designate from time to time by written notice to ResNet.
Interest at a rate of 1.5% per month (or at the highest allowable rate under
law, if lower) will accrue upon all unpaid balances outstanding for more than 30
days after the due date.
3. Term. The term of this Agreement shall be for a period of five years
----
from the date first above written (the "Initial Term") subject to an extension
of one year at the option of ResNet if ResNet has not placed purchase orders,
including the Initial Purchase Order, for Equipment totaling $40 million during
the Initial Term.
4. Mutual Representations and Warranties. Each of TCI-Satellite and
-------------------------------------
ResNet represents and warrants to the other that (i) it has full power and legal
right to execute and deliver this Agreement and to perform its obligations under
this Agreement; (ii) the execution, delivery and performance of this Agreement
have been authorized by all required action, corporate or otherwise, and do not
violate or conflict with any provisions of its charter or bylaws or any
contractual obligations or requirements of law binding on it; (iii) this
Agreement constitutes its legal, valid and binding obligation, enforceable
against it in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and
general principles of equity; and (iv) it has and shall maintain in full force
and effect throughout the term of this Agreement, all governmental permits,
licenses and authorizations required on its part to perform its obligations
under this Agreement.
5. Termination. This Agreement may be terminated prior to the end of the
-----------
Initial Term or any extension thereof as provided in this Section 5 and the
rights and remedies of the Parties upon such termination shall be as set forth
in this Section 5.
(a) Either Party (the "Non-Defaulting Party") may terminate this
Agreement upon a material breach of this Agreement by the other Party (the
"Defaulting Party") if such material breach is not cured by the Defaulting Party
within 30 days of its receipt of written notice regarding such breach from the
Non-Defaulting Party.
(b) TCI-Satellite may terminate this Agreement if ResNet uses
Equipment other than in connection with the Business or permits any other entity
or person to use Equipment provided hereunder, except as specifically provided
in Section 1(f), without the prior written consent of TCI-Satellite.
(c) Subject to the provisions of Section 6, either Party may terminate
this Agreement if the other Party files (or is the debtor in such a filing by a
third party) any proceeding in bankruptcy, receivership, or insolvency, and such
petition is not discharged within 60 days, or
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makes an assignment for the benefit of its creditors, or allows any substantial
attachment or execution to be levied upon any material part of its property
(collectively referred to as "Bankruptcy").
(d) Subject to the provisions of Section 9, no remedy conferred by any
other specific provision of this Agreement is intended to be exclusive of any
other remedy available to TCI-Satellite or ResNet hereunder or to any other
remedy available at law or in equity, whether by statute, rule, or otherwise.
6. Conditional Covenant to Continue Performance by TCI-Satellite. In the
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event of a Bankruptcy of ResNet, TCI-Satellite agrees that it will continue to
perform its obligations under this Agreement and will not terminate this
Agreement under Section 5(c) if and to the extent that LodgeNet elects to and
does advance to ResNet, as an intercompany loan, after a Bankruptcy of ResNet,
funds in an amount equal to the amount of the purchase price for the Equipment
to be sold by TCI-Satellite to ResNet under the terms of this Agreement after a
Bankruptcy of ResNet.
7. Notices. All notices, demands, requests, or other communications
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which may be or are required to be given, served, or sent by one Party to the
other Party pursuant to this Agreement (except as otherwise specifically
provided in this Agreement) shall be in writing and shall be delivered
personally, by overnight messenger or mailed by first-class certified mail,
return receipt requested, postage prepaid, addressed as follows:
If to ResNet: 808 West Avenue North
Sioux Falls, South Dakota 57104
Attn: Chief Operating Officer
Telephone: (605) 330-1330
With a copy similarly addressed to the attention of
Eric R. Jacobsen, Vice President and General Counsel
With a copy to: Pillsbury Madison & Sutro L.L.P.
235 Montgomery Street
San Francisco, California 94104
Attn: Gregg F. Vignos, Esq.
Telephone: (415) 983-1649
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If to TCI-Satellite: 8085 South Chester Street
Suite 300
Englewood, Colorado 80112
Attn: Toby DeWeese
Telephone: (303) 712-4725
With a copy similarly addressed to the
attention of Corporate Counsel
Telephone: (303) 712-4618
With a copy to: Sherman & Howard L.L.C.
633 Seventeenth Street
Suite 3000
Denver, Colorado 80202
Attn: Peggy Knight, Esq.
Telephone: (303) 299-8140
Either Party may designate by notice in writing a new address or addressee
to which any notice, demand, request, or communication may thereafter be so
given, served or sent. Each notice, demand, request, or communication shall be
deemed sufficiently given, served, sent or received for all purposes at such
time as it is delivered to the addressee named above as to each Party, with the
signed messenger receipt, return receipt, or the delivery receipt being deemed
conclusive evidence of such delivery, or at such time as delivery is refused by
the addressee upon presentation.
8. Assignment. Neither Party may assign any of its rights or delegate
----------
any of its duties hereunder without the prior written consent of the other
Party; provided that either Party may assign this entire Agreement to an
Affiliate of such Party or to a person or entity that acquires all or
substantially all of the assets or business of such Party if such Party gives
prior written notice to the other Party and delivers an assumption agreement of
the assignee in form and substance reasonably satisfactory to the other Party
pursuant to which such assignee assumes the obligations of the assigning Party
under this Agreement. Each Party agrees that it will cause any acquiror of all
or substantially all of the assets or business of such Party to assume this
Agreement. Subject to the foregoing, this Agreement shall be binding upon and
shall inure to the benefit of the Parties, their respective successors and
permitted assigns. For purposes of this Section 8, "assign" shall mean to
directly or indirectly sell, assign, convey, lease, sublease or permit the use
in any manner of the Equipment or any other rights or obligations under this
Agreement.
9. Limitation of Liability. Notwithstanding any contrary provision of
-----------------------
this Agreement, TCI-Satellite shall not be liable to ResNet, and ResNet shall
not be liable to TCI-Satellite, for any amounts representing their or their
customers' respective loss of profits, loss of business, or direct or indirect
special, exemplary, consequential, or punitive damages, arising from the
performance or nonperformance of this Agreement, or any acts or omissions
associated therewith or related to the use of any Equipment furnished hereunder,
whether the basis of the liability is breach of contract, tort
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(including negligence and strict liability), statutes, or any other legal
theory. Nothing contained in this Section 9 is intended to or shall be deemed
to preclude either Party from making any claim for direct damages (including
reasonable attorneys' fees and costs) resulting from a breach of this Agreement
by the other Party, and each Party hereby acknowledges that this Section 9 is
intended specifically to eliminate liability only for any consequential damages.
10. Taxes. ResNet shall pay any sales, use, excise or other taxes (other
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than taxes measured on the income of TCI-Satellite) associated with the
Equipment to be provided by TCI-Satellite to ResNet hereunder.
11. Relationship of the Parties. It is expressly understood that the
---------------------------
Parties intend by this Agreement to establish the relationship of independent
contractors, and do not intend to undertake the relationship of principal and
agent or to create a joint venture or partnership between themselves or their
respective successors in interest. Neither Party shall have any authority to
create or assume, in the name of or on behalf of the other Party any obligation,
expressed or implied, or to act or purport to act as an agent or legally
empowered representative of the other Party hereto for any purpose whatsoever.
12. General.
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(a) Except as expressly set forth herein, the fees and expenses
(including the fees of any lawyers, accountants, investment bankers or others
engaged by a Party) in connection with this Agreement and the transactions
contemplated hereby, whether or not the transactions contemplated hereby are
consummated, will be paid by the Party incurring the same.
(b) All documentation, notices, reports and correspondence under this
Agreement shall be submitted and maintained in the English language. As used
herein, the singular shall include the plural and the plural may refer to only
the singular. The use of any gender shall be applicable to all genders. The
captions contained herein are for purpose of convenience only and are not part
of the Agreement. Unless otherwise specified, all references to Sections and
Exhibits in this Agreement are references to Sections of, and Exhibits to, this
Agreement.
(c) If any portion or portions of this Agreement shall be deemed, for
any reason, invalid or unenforceable, the remaining portion or portions shall
nevertheless be valid, enforceable, and in effect, unless such remaining portion
or portions are not reasonably adequate to accomplish the basic purposes and
intent of the Parties. The Parties will negotiate in good faith to replace any
invalid or unenforceable provision of this Agreement with an enforceable
provision that accomplished the original intent of the Parties to the extent
reasonably practicable.
(d) This Agreement cannot be amended except by a written instrument
signed by the Parties hereto.
-7-
<PAGE>
(e) Either Party's failure to enforce any provision of this Agreement
shall not in any way be construed as a waiver of any such provision as to any
future violations thereof or prevent that Party thereafter from enforcing each
and every other provision of this Agreement. No waiver of any right or remedy
hereunder shall be effective unless contained in a writing signed by the waiving
Party. The rights granted to the Parties herein are cumulative and the waiver by
a Party of any single remedy shall not constitute a waiver of such Party's right
to assert all other legal remedies available to it under the circumstances.
(f) Termination or expiration of this Agreement for any reason shall
not release either Party from any liabilities or obligations set forth in this
Agreement which the Parties have expressly agreed shall survive any termination
or expiration, or remain to be performed or by their nature would be intended to
be applicable following any such termination or expiration.
(g) This Agreement shall be governed and interpreted by the laws of
the State of Delaware, without regard to its conflict of law rules. The Parties
agree that all litigation relating to this Agreement shall be brought in the
state and federal courts of appropriate subject matter jurisdiction in Delaware
and each Party hereby submits itself to the non-exclusive in personam
jurisdiction of such courts for purposes of any such litigation. Neither Party
shall object to venue in such courts on the grounds of an inconvenient forum or
otherwise. In the event of any litigation between the Parties relating to this
Agreement, the prevailing Party shall be entitled to recover, in addition to any
other relief awarded by the court, its reasonable attorneys fees and all other
costs of preparing for and participating in the litigation, including all
appeals.
(h) Neither Party will be in default or otherwise liable for any
delay in or failure of its performance under this Agreement where such delay or
failure arises by reason of any act of God, acts of the common enemy, the
elements, earthquake, floods, fires, epidemics, quarantine restrictions, riots,
strikes, failure or delay in transportation, freight embargoes or other causes
beyond its control.
(i) This Agreement, together with any exhibits, schedules,
appendices, and other attachments, expresses the understanding of the Parties
hereto and supersedes all prior agreements, whether oral or written, relating to
the subject matters specifically expressed herein; provided, however, that the
Parties acknowledge that simultaneously with the execution of this Agreement
they or their affiliates are entering into the Loan Agreement, a Subscription
Agreement, a Signal Availability Agreement, an Option Agreement, a Stockholders'
Agreement, and a Standstill Agreement, which documents are related to this
Agreement in that they collectively document a transaction between the Parties
of which this Agreement is a part.
(j) This Agreement may be executed in any number of counterparts each
of which shall be an original with the same effect as if the signatures thereto
and hereto were upon the same instrument.
-8-
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first above written.
RESNET COMMUNICATIONS, INC. TCI SATELLITE ENTERTAINMENT, INC.
By: By:
------------------------------ ----------------------------------
Name: Name:
---------------------------- --------------------------------
Title: Title:
--------------------------- -------------------------------
ACCEPTED AND AGREED WITH RESPECT
TO SECTIONS 1(f) AND 6:
LODGENET COMMUNICATIONS, INC.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
-1-
<PAGE>
EXHIBIT 10.13
SUBORDINATED CONVERTIBLE
TERM LOAN AGREEMENT
BY AND BETWEEN
RESNET COMMUNICATIONS, INC.
AS BORROWER
AND
TCI SATELLITE ENTERTAINMENT, INC.
AS LENDER
Dated as of October 21, 1996
$34,603,947
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C> <C>
ARTICLE 1 - Definitions...................................................... 1
ARTICLE 2 - Terms of Loan.................................................... 5
2.1 Loans............................................................ 5
2.2 Procedure for Loans.............................................. 5
2.3 Interest......................................................... 5
(a) Interest................................................. 5
(b) Computation of Interest.................................. 5
(c) Maximum Interest Rate.................................... 5
2.4 Payments......................................................... 6
(a) Payments of Loans........................................ 6
(b) No Prepayment............................................ 6
2.5 No Security...................................................... 6
2.6 Subordination.................................................... 6
ARTICLE 3 - Conditions Precedent............................................. 6
3.1 No Existing Default.............................................. 6
3.2 Purchase Order; Invoice.......................................... 6
ARTICLE 4 - Representations and Warranties of Borrower....................... 7
4.1 Due Organization and Authority................................... 7
4.2 Authorization.................................................... 7
4.3 Governmental Requirements........................................ 7
4.4 Consents......................................................... 7
4.5 No Conflict...................................................... 7
4.6 Binding Effect................................................... 7
4.7 Litigation....................................................... 8
ARTICLE 5 - Representations and Warranties of Lender......................... 8
5.1 Due Organization and Authority................................... 8
5.2 Authorization.................................................... 8
5.3 Governmental Requirements........................................ 8
5.4 Consents......................................................... 8
5.5 No Conflict...................................................... 9
5.6 Binding Effect................................................... 9
5.7 Litigation....................................................... 9
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 6 - Covenants....................................................... 9
6.1 Accounting Records.............................................. 9
6.2 Corporate Existence............................................. 9
6.3 Compliance With Governmental Requirements....................... 10
6.4 Taxes and Other Liabilities..................................... 10
6.5 Indemnification................................................. 10
6.6 Use of Proceeds................................................. 10
6.7 Financial Statements............................................ 10
6.8 Insurance....................................................... 10
6.9 Maintenance of Property......................................... 10
6.10 Conduct of Business............................................. 10
6.11 Notification of Events of Default and Adverse Developments...... 10
6.12 Limitation on Transactions with Affiliates...................... 11
6.13 Limitation on Restricted Payments............................... 11
6.14 Merger, Consolidation and Sale of Assets........................ 12
6.15 Limitation on Other Business.................................... 13
ARTICLE 7 - Events of Default............................................... 13
7.1 Events of Default............................................... 13
(a) Bankruptcy............................................... 13
(b) Material Violation of Transaction Documents.............. 14
7.2 Termination of Commitment....................................... 14
7.3 Other Remedies.................................................. 14
ARTICLE 8 - Conversion...................................................... 14
8.1 Conversion by Lender............................................ 14
8.2 Effect of Conversion............................................ 17
8.3 Limitation on Conversion Rights................................. 18
8.4 MANDATORY CONVERSION............................................ 18
ARTICLE 9 - Warrant......................................................... 18
9.1 Issuance of Warrant............................................. 18
9.2 Effect of Issuance of Warrant................................... 18
9.3 Transferability of Warrant...................................... 18
ARTICLE 10 - Further Assurances............................................. 19
ARTICLE 11 - Miscellaneous.................................................. 19
11.1 Successors and Assigns......................................... 19
11.2 No Implied Waiver.............................................. 19
11.3 Amendments; Waivers............................................ 19
11.4 Severability................................................... 20
</TABLE>
(ii)
<PAGE>
<TABLE>
<S> <C> <C>
11.5 Notices......................................................... 20
11.6 Construction.................................................... 21
11.7 Survival........................................................ 21
11.8 Governing Law; Choice of Forum.................................. 21
11.9 Integration..................................................... 21
11.10 Counterparts.................................................... 22
</TABLE>
(iii)
<PAGE>
EXECUTION COPY
SUBORDINATED CONVERTIBLE
------------------------
TERM LOAN AGREEMENT
-------------------
This SUBORDINATED CONVERTIBLE TERM LOAN AGREEMENT is dated as of October
21, 1996, by and between ResNet Communications, Inc., a Delaware corporation
("Borrower"), and TCI Satellite Entertainment, Inc., a Delaware corporation
("Lender").
RECITALS
--------
WHEREAS, Borrower has requested Lender to lend funds to Borrower to enable
Borrower to acquire certain equipment from Lender; and
WHEREAS, Lender has agreed to lend to Borrower, subject to the terms and
conditions hereof, and Borrower desires to obtain from Lender, a loan in a
maximum principal amount not to exceed $34,603,947 to be used as a credit
facility for Borrower to draw down the purchase price to be paid by Borrower to
Lender for the purchase of certain equipment.
NOW, THEREFORE, in consideration of the premises set forth above and the
mutual promises and agreements hereinafter set forth, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
specifically acknowledged, the parties hereto agree as follows:
ARTICLE 1
---------
Definitions
-----------
In addition to any terms defined elsewhere in this Agreement, the following
terms have the meanings indicated for purposes of this Agreement (such
definitions being equally applicable to the singular and plural forms of the
defined term):
"Adjusted Conversion Formula" shall have the meaning set forth in Section
8.1(b).
"Affiliate" of any Person at any time shall mean any other Person directly
or indirectly controlling, controlled by or under common control with such
Person at such time; with "control" for such purposes meaning ownership of
securities representing at least 75% of the economic interests in and 75% of the
voting power of a Person.
"Agreement" means this Subordinated Convertible Term Loan Agreement, as
amended from time to time.
"Base Conversion Formula" shall have the meaning set forth in Section
8.1(a).
<PAGE>
"Borrower" shall have the meaning set forth in the heading to this
Agreement.
"Borrower Bank Guaranty" shall mean that certain Guaranty of Borrower dated
as of March 11, 1996, as amended by Amendment No. 1 to Guaranty dated as of
October 21, 1996, executed and delivered in connection with that certain Loan
Agreement dated as of March 11, 1996, as amended by Amendment No. 1 to Loan
Agreement dated as of October 21, 1996, among LodgeNet, the Banks named therein,
National Westminster Bank Plc, New York Branch, as Agent, and National
Westminster Bank of Canada, as Issuing Bank.
"Borrowing Date" shall have the meaning given it in Section 2.2 of this
Agreement.
"Business" shall mean the business of Borrower, operating as a "private
cable operator" under applicable federal law providing video on-demand, basic
and premium cable television programming and other interactive, multi-media
entertainment and information services to subscribers in multiple dwelling units
with facilities that do not use any public right-of-way.
"Closing Date" means the date of execution of this Agreement by Lender and
Borrower.
"Commitment" means the commitment by Lender to make loans to Borrower under
this Agreement up to a maximum principal amount of $34,603,947.
"Common Control Affiliate" means, with respect to any Person, any other
Person directly or indirectly controlling, controlled by, or under common
control with such Person; with "control" for such purposes meaning the right
generally to elect a majority of the directors (or similar officials) of a
Person or the possession, by contract or otherwise, of authority to direct the
management and policies of a Person.
"Conversion Date" means any date specified in any notice given pursuant to
Section 8.1 hereof for conversion of all or any portion of the principal amount
of the Loans.
"Conversion Stock" shall have the meaning set forth in Section 8.1.
"Conversion Warrant" shall have the meaning set forth in Section 9.1.
"EBITDA" shall mean gross revenues from operations less all operating
expenses, determined on an accrual basis in accordance with GAAP for the most
recent twelve-month period ending as of the end of the month immediately
preceding the date of determination, before non-recurring items of income, gain
or expense (including gain or loss on disposition of any assets) and before
deduction of any amount on account of interest, income taxes, depreciation,
amortization, or other similar non-cash charges.
"Equipment" shall have the meaning set forth in Section 2.2.
-2-
<PAGE>
"Equipment Sale Agreement" shall have the meaning set forth in Section 2.2.
"Event of Default" shall have the meaning set forth in Section 7.1.
"Extension" means the right of Borrower to elect to extend the term of this
Agreement for one year beyond the Maturity Date if the maximum amount of the
Commitment has not been advanced under this Agreement on or before the Maturity
Date, which election shall be made by Borrower by giving written notice to
Lender at least 30 and not more than 180 days prior to the Maturity Date.
"FCC" means the United States Federal Communications Commission.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"Governmental Authority" means any nation or government, any state,
province or other political subdivision thereof or any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Governmental Requirement" means all legal requirements in effect from time
to time including all laws, statutes, codes, acts, ordinances, orders,
judgments, decrees, injunctions, rules, regulations, permits, licenses,
authorizations, certificates, orders, franchises, determinations, approvals,
notices, demand letters, directions and requirements of all governments,
departments, commissions, boards, courts, authorities, agencies, officials and
officers, and all instruments of record, foreseen or unforeseen, ordinary or
extraordinary, including but not limited to any change in any law, regulation or
the interpretation thereof by any Governmental Authority (whether or not having
the force of law), relating now or at any time heretofore or hereafter to the
business or operations of Borrower or to any of the property owned, leased or
used by Borrower, including, without limitation, the development, design,
construction, acquisition, start-up, ownership and operation and maintenance of
property.
"Initial Stock" shall have the meaning set forth in Section 8.1(b).
"Lien" means any lien, mortgage, pledge, security interest, charge or
encumbrance of any kind (including any conditional sale or other title retention
agreement, any lease in the nature thereof, and any agreement to give any
security interest).
"Loans" shall have the meaning set forth in Section 2.1.
-3-
<PAGE>
"LodgeNet" means LodgeNet Entertainment Corporation, a Delaware
corporation, the parent of Borrower, including any successor corporation.
"LodgeNet Debt" shall have the meaning set forth in Section 2.6.
"Material Adverse Effect" means a material adverse effect on the business,
assets, operations or financial condition of a Person.
"Maturity Date" means October 21, 2001, subject to the Extension.
"Option Agreement" means the agreement pursuant to which Borrower is
granting to Lender an option to acquire the Option Stock, which agreement is
being executed and delivered on the date of and simultaneously with the
execution of this Agreement.
"Option Stock" shall mean 260,200 shares of common stock of Borrower that
Borrower has granted Lender an option to acquire pursuant to the terms of the
Option Agreement or the Option Warrant.
"Option Warrant" shall mean a warrant that will be issued by Borrower to
Lender to acquire the unexercised portion of the Option Stock upon the
termination of the Option Agreement if Lender has not exercised its option in
full to acquire the Option Stock and the Conversion Warrant is issued by
Borrower to Lender.
"Permitted Third Party Equipment Purchase" shall have the meaning set forth
in Section 2.2.
"Person" means an individual, a corporation, a partnership (general,
limited or limited liability), a joint venture, an association, a trust, a
limited liability company, or any other organization or entity, including a
Governmental Authority.
"Previously Issued Stock" shall have the meaning set forth in Section
8.1(b).
"Reconciliation Stock" shall have the meaning set forth in Section 8.1(f).
"Regulatory Restrictions" shall have the meaning set forth in Section 8.3.
"Signal Availability Agreement" shall mean the Signal Availability
Agreement being entered into between Lender and Borrower on the date of and
simultaneously with the execution of this Agreement pursuant to which Lender
will provide distribution of programming in connection with Borrower's Business.
"SMATV" means satellite master antenna television.
-4-
<PAGE>
"Termination Date" means the date that is the earlier of (i) the Maturity
Date, or (ii) the date on which the aggregate principal amount of the Loans
converted pursuant to Section 8.1 is equal to the maximum amount of the
Commitment.
"Transaction Documents" shall have the meaning set forth in Section 11.9.
Each accounting term not defined herein and each accounting term partly defined
herein to the extent not defined shall have the meaning given to it under GAAP.
ARTICLE 2
---------
Terms of Loan
-------------
2.1 Loans. Subject to the terms and conditions of this Agreement, Lender
-----
agrees to make loans (the "Loans") from time to time before the Termination Date
in an aggregate principal amount not to exceed the maximum amount of the
Commitment, including the total principal amount of Loans converted into stock
of Borrower pursuant to Section 8.1. Upon prior or contemporaneous satisfaction
of the conditions precedent contained in Article 3, or waiver by Lender of any
conditions not so satisfied, Lender shall advance the Loans on the terms and
conditions and for the uses specified in this Agreement.
2.2 Procedure for Loans. Borrower may borrow pursuant to this Article 2
-------------------
by giving Lender a purchase order for integrated receiver-decoders, low-noise
block converters and other equipment (the "Equipment") pursuant to the Equipment
Sale Agreement (the "Equipment Sale Agreement") between Lender and Borrower
dated the same date as this Agreement or by giving Lender an invoice for
Equipment purchased by Borrower from a third party as permitted under the
Equipment Sale Agreement (a "Permitted Third Party Equipment Purchase"). Lender
shall advance Loans under this Agreement to pay the purchase price for the
Equipment upon shipping the Equipment to Borrower or within 30 days after
receipt of an invoice for any Permitted Third Party Equipment Purchase, as
applicable (the "Borrowing Date").
2.3 Interest.
--------
(a) Interest. The Loans shall accrue interest from the date of
--------
disbursement on the unpaid principal amount thereof until such amount is paid in
accordance with Section 2.4(a) at a rate per annum equal to seven and nine-
tenths percent (7.9%), but not to exceed the Maximum Rate.
(b) Computation of Interest. Interest shall accrue daily and shall be
-----------------------
computed for the actual number of days elapsed on the basis of a year consisting
of 365 days. Accrued but unpaid interest shall be accumulated and shall not be
added to principal.
(c) Maximum Interest Rate. Nothing in this Agreement shall require
---------------------
Borrower to pay interest at a rate (the "Maximum Rate") exceeding the maximum
amount permitted by applicable law
-5-
<PAGE>
to be charged by Lender. If the amount of interest payable for the account of
Lender on any day in respect of the immediately preceding interest computation
period, computed pursuant to this Article 2, would exceed the Maximum Rate, the
amount of interest payable for its account on such interest payment date shall
automatically be reduced to the Maximum Rate.
2.4 Payments.
--------
(a) Payments of Loans. On the Maturity Date (subject to the Extension), if
-----------------
Lender has not converted the Loans into the maximum amount of Conversion Stock
pursuant to Section 8.1, Borrower shall issue the Conversion Warrant to Lender
pursuant to Article 9, and all principal and accrued and unpaid interest on the
Loans under this Agreement shall be cancelled upon issuance of the Conversion
Warrant to Lender. LENDER'S SOLE RECOURSE WITH RESPECT TO THE LOANS (INCLUDING
ALL ACCRUED AND UNPAID INTEREST) SHALL BE LIMITED TO EITHER CONVERSION PURSUANT
TO SECTION 8.1 OR ISSUANCE OF THE CONVERSION WARRANT PURSUANT TO ARTICLE 9.
(b) No Prepayment. Borrower may prepay the Loans in whole or in part only
-------------
with the consent of Lender and on the terms and conditions agreed by Lender and
Borrower.
2.5 No Security. The Loans made under this Agreement shall be unsecured
-----------
obligations of Borrower.
2.6 Subordination. The Loans (including all accrued and unpaid interest)
-------------
made under this Agreement shall be subordinated to (i) any intercompany loans
made by LodgeNet to Borrower (the "LodgeNet Debt"), (ii) the Borrower Bank
Guaranty, and (iii) to any other debt incurred by Borrower, all in accordance
with the Subordination Provisions attached as Exhibit A. The Subordination
Provisions set forth in Exhibit A hereto are, for every purpose, fully
incorporated and made an integral part of the enforceable terms and conditions
of this Agreement.
ARTICLE 3
---------
Conditions Precedent
--------------------
The obligation of Lender to make any Loan is subject to the following
conditions precedent:
3.1 No Existing Default. No Event of Default shall exist on the Borrowing
-------------------
Date; and
3.2 Purchase Order; Invoice. Lender shall have received a purchase order
-----------------------
for Equipment or an invoice for a Permitted Third Party Equipment Purchase for a
purchase price in the amount of the Loan to be advanced on the Borrowing Date.
-6-
<PAGE>
ARTICLE 4
---------
Representations and Warranties of Borrower
------------------------------------------
In order to induce Lender to enter into this Agreement and to make the
Loans, Borrower makes the following representations and warranties to Lender:
4.1 Due Organization and Authority. It (a) is a corporation, duly
------------------------------
organized, validly existing, and in good standing under the laws of the State of
Delaware, (b) is authorized to transact business and is in good standing in each
state where its ownership of assets or conduct of business requires such
qualification, and (iii) has all corporate powers required to carry on its
business as conducted on the date hereof and as proposed to be conducted, with
such exceptions to clauses (ii) and (iii) as would not have a Material Adverse
Effect on Borrower or a material adverse effect on the ability of Borrower to
perform its obligations under this Agreement or under the Transaction Documents.
4.2 Authorization. The execution, delivery and performance by it of
-------------
this Agreement an d the Transaction Documents are within its corporate powers
and have been duly authorized by all necessary corporate action on its part.
Each Person executing this Agreement and the Transaction Documents on behalf of
Borrower is fully authorized to execute and deliver the same.
4.3 Governmental Requirements. The execution, delivery, and performance
-------------------------
by it of this Agreement and the Transaction Documents require no material action
by or in respect of, or material filing with, any Governmental Authority other
than those that have been obtained or made and are in full force and effect.
4.4 Consents. No consent by any Person under any contract to which
--------
it or LodgeNet is a party or to which their respective assets are subject is
required or necessary for the execution, delivery and performance by it of this
Agreement or the Transaction Documents, except those set forth on Schedule 4.4
all of which have been obtained and are in full force and effect.
4.5 No Conflict. The execution, delivery and performance of this
-----------
Agreement and the Transaction Documents by it do not and will not (x) contravene
its certificate of incorporation or bylaws or (y) result in or constitute a
breach or default (including any event that, with the passage of time or giving
of notice, or both, would become a breach or default) under any applicable
Governmental Requirement or any judgment, injunction, order, decree, contract,
license, lease, indenture, mortgage, loan agreement, note or other agreement or
instrument to which it is a party or by which any of its properties may be
bound, the effect of which would be to cause a Material Adverse Effect on
Borrower or a material adverse effect on the ability of Borrower to perform its
obligations under this Agreement or under the Transaction Documents.
4.6 Binding Effect. This Agreement has been duly executed and delivered
--------------
by it and constitutes its valid and binding obligation, enforceable against it
in accordance with its terms, except
-7-
<PAGE>
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
or by the principles governing the availability of equitable remedies.
4.7 Litigation. There are no suits, claims, grievances, actions,
----------
proceedings, or governmental investigations pending or, to the best knowledge of
Borrower or LodgeNet, threatened against or affecting Borrower which (i) seek to
restrain or enjoin the consummation of the transactions contemplated by this
Agreement or (ii) might have a Material Adverse Effect on Borrower. Borrower is
not in violation of any term of any judgment, decree, injunction, or order to
which it is subject, which violation could have a Material Adverse Effect on
Borrower or a material adverse effect on the ability of Borrower to perform its
obligations under this Agreement or under the Transaction Documents.
ARTICLE 5
---------
Representations and Warranties of Lender
----------------------------------------
Lender represents and warrants to Borrower that:
5.1 Due Organization and Authority. It (i) is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, (ii) is authorized to transact business and is in good standing in
each state in which its ownership of assets or conduct of business requires such
qualification, and (iii) has all corporate powers required to carry on its
business as conducted on the date hereof and as proposed to be conducted, with
such exceptions to clauses (ii) and (iii) as would not have a material adverse
effect on the ability of Lender to perform its obligations under this Agreement
or under the Transaction Documents.
5.2 Authorization. The execution, delivery and performance by it of this
-------------
Agreement and the Transaction Documents are within its corporate powers and have
been duly authorized by all necessary corporate action on its part. Each Person
executing this Agreement and the Transaction Documents on behalf of Lender is
fully authorized to execute and deliver the same.
5.3 Governmental Requirements. The execution, delivery and performance by
-------------------------
it of this Agreement and the Transaction Documents require no material action by
or in respect of, or filing with, any Governmental Authority other than those
that have been obtained or made and are in full force and effect.
5.4 Consents. No consent by any Person under any contract to which it is
--------
a party or to which its assets are subject is required or necessary for the
execution, delivery and performance by it of this Agreement or the Transaction
Documents, with such exceptions as would not have a material adverse effect on
the ability of Lender to perform its obligations under this Agreement or under
the Transaction Documents.
-8-
<PAGE>
5.5 No Conflict. The execution, delivery and performance by it of this
-----------
Agreement and the Transactions Documents do not and will not (x) contravene its
certificate of incorporation or bylaws or (y) result in or constitute a breach
or default (including any event that, with the passage of time or giving of
notice, or both, would become a breach or default) under any applicable
Governmental Requirement or any judgment, order, decree, contract, license,
lease, indenture, mortgage, loan agreement, note, security agreement or other
agreement or instrument to which it is a party or by which any of its properties
may be bound, the effect of which would be to cause a material adverse effect on
the ability of Lender to perform its obligations under this Agreement or under
the Transaction Documents.
5.6 Binding Effect. This Agreement has been duly executed and delivered
--------------
by it and constitutes its valid and binding obligation, enforceable against it
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally or by the principles governing the
availability of equitable remedies.
5.7 Litigation. There are no suits, claims, grievances, actions,
----------
proceedings, or governmental investigations pending or, to the best knowledge of
Lender, threatened against or affecting Lender which (i) seek to restrain or
enjoin the consummation of the transactions contemplated by this Agreement or
the Transaction Documents or (ii) might have a material adverse effect on the
ability of Lender to perform its obligations under this Agreement or under the
Transaction Documents. Lender is not in violation of any term of any judgment,
decree, injunction, or order to which it is subject, which violation could have
a material adverse effect on the ability of Lender to perform its obligations
under this Agreement or under the Transaction Documents.
ARTICLE 6
---------
Covenants
---------
Unless Lender shall agree in writing otherwise, Borrower shall comply
with the following provisions so long as any Loans are outstanding:
6.1 Accounting Records. Borrower shall maintain adequate books and
------------------
accounts in accordance with GAAP consistently applied. Borrower shall promptly
furnish to Lender any information regarding its business or finances as Lender
may reasonably request.
6.2 Corporate Existence. Borrower shall preserve and maintain its
-------------------
corporate existence and shall preserve all of its licenses, privileges and
contracts and other rights necessary or desirable in the normal course of its
business, except to the extent that the failure to preserve and maintain such
rights would not have a Material Adverse Effect on Borrower or a material
adverse effect on the ability of Borrower to perform is obligations under this
Agreement or under the Transaction Documents.
-9-
<PAGE>
6.3 Compliance With Governmental Requirements. Borrower shall comply
-----------------------------------------
with all Governmental Requirements, except where the failure to do so would not
have a Material Adverse Effect on Borrower or a material adverse effect on the
ability of Borrower to perform is obligations under this Agreement or under the
Transaction Documents.
6.4 Taxes and Other Liabilities. Borrower shall pay and discharge
---------------------------
when due any and all indebtedness, obligations, assessments and real and
personal property taxes, including, but not limited to, federal and state taxes,
except as may be subject to good faith contest diligently pursued.
6.5 Indemnification. Borrower shall indemnify and hold Lender and
---------------
its agents, successors and assigns (collectively, the "Indemnitees") harmless
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, expenses and disbursements
(including, without limitation, the reasonable fees and disbursements of
counsel) which may be imposed on, incurred by or asserted against such
Indemnitees in any manner relating to or arising out of the making of the Loans.
6.6 Use of Proceeds. Borrower shall use the proceeds of the Loans
---------------
only to purchase Equipment from Lender or to make a Permitted Thirty Party
Equipment Purchase pursuant to the Equipment Sale Agreement.
6.7 Financial Statements. Borrower shall furnish to Lender such
--------------------
financial statements of Borrower and such additional information, reports or
statements as Lender may from time to time reasonably request.
6.8 Insurance. Borrower shall maintain insurance with responsible
---------
insurance companies against such risks, on such properties and in such amounts
as is customarily maintained by similar businesses and consistent with
Borrower's past practices.
6.9 Maintenance of Property. Borrower shall maintain, keep and
-----------------------
preserve all of its properties in good repair, working order and condition and
from time to time make all necessary and proper repairs, renewals, replacement
and improvements thereto, with such exceptions as would not have a Material
Adverse Effect on Borrower.
6.10 Conduct of Business. Borrower shall (i) use reasonable
-------------------
commercial efforts to preserve, renew and keep in full force and effect all of
its contracts, (ii) use reasonable commercial efforts to preserve, renew and
maintain in full force and effect all of its franchises and licenses necessary
or desirable in the normal conduct of its business, and (iii) comply with the
terms of all instruments which evidence, secure or govern its indebtedness, with
such exceptions as would not have a Material Adverse Effect on Borrower.
6.11 Notification of Events of Default and Adverse Developments.
----------------------------------------------------------
Borrower shall promptly notify Lender of the occurrence of (i) any Event of
Default hereunder; (ii) any event, development or circumstance whereby the
financial statements most recently furnished to Lender
-10-
<PAGE>
fail in any material respect to present fairly, in accordance with GAAP, the
financial condition and operating results of Borrower as of the date of such
financial statements; (iii) any material litigation or proceedings that are
instituted or threatened (to the knowledge of Borrower) against Borrower;
(iv) each and every event which would be an event of default (or an event which
with the giving of notice or lapse of time or both would be an event of default)
under any indebtedness of Borrower, such notice to include the names and
addresses of the holders of such indebtedness and the amount thereof; and
(v) any other development in the business or affairs of Borrower if the effect
thereof involves a significant risk of a Material Adverse Effect on Borrower; in
each case describing the nature thereof and the action Borrower proposes to take
with respect thereto.
6.12 Limitation on Transactions with Affiliates. Borrower will not
------------------------------------------
amend the Borrower Bank Guaranty to extend the liability of Borrower beyond the
LodgeNet Debt; and Borrower will not, and will not permit any of its
subsidiaries to, directly or indirectly, enter into, renew or extend any
transaction (including, without limitation, the purchase, sale, lease or
exchange of property or assets, or the rendering of any service) with any of
their respective Common Control Affiliates, except upon fair and reasonable
terms no less favorable to Borrower than could be obtained, at the time of such
transaction or at the time of the execution of the agreement providing therefor,
in a comparable arm's-length transaction with a Person that is not a Common
Control Affiliate. The foregoing limitation does not limit, and shall not apply
to (i) any sale of Equipment by Borrower to LodgeNet in accordance with the
terms of the Equipment Sale Agreement; (ii) transactions for which Borrower or a
subsidiary delivers to Lender a written opinion of a nationally recognized
investment banking firm stating that the transaction is fair to Borrower or such
subsidiary from a financial point of view; (iii) any transaction solely between
Borrower and any of its wholly owned subsidiaries or solely between wholly owned
subsidiaries; or (iv) any Restricted Payments not prohibited by Section 6.13.
6.13 Limitation on Restricted Payments. Borrower will not, and will
---------------------------------
not permit any of its subsidiaries to, directly or indirectly, (A) declare or
pay any dividend or make any distribution on its capital stock (other than
dividends or distributions payable solely in shares of stock of the same class
or in options, warrants or other rights to acquire such shares); (B) purchase,
redeem, retire or otherwise acquire for value any shares of capital stock of
Borrower or any of its subsidiaries (including options, warrants or other rights
to acquire such shares of capital stock); or (C) make any Investment, other than
a Permitted Investment, in any Person (such payments or any other actions
described in clauses (A) through (C) of this sentence being collectively
"Restricted Payments"). Notwithstanding the foregoing, Restricted Payments shall
not include, and the limitation on Restricted Payments contained in this Section
6.13 shall not be deemed to restrict or limit, (i) payments of principal and
interest on LodgeNet Debt in accordance with the terms and conditions of such
LodgeNet Debt which shall be a direct pass-through of the interest rate and
amortization provisions of debt incurred by LodgeNet from an unrelated third
party some or all of the proceeds of which are used for purposes of making an
intercompany loan to Borrower, (ii) payments of principal and interest on
LodgeNet Debt the terms of which shall provide for regularly scheduled
amortization beginning three years from the date of incurrence of such LodgeNet
Debt based on the weighted average interest rate on and weighted average
term of debt (excluding revolving credit facilities) incurred by LodgeNet
from unrelated third parties if the proceeds of any LodgeNet Debt result from
equity investments in LodgeNet, (iii) payment of a management fee to LodgeNet in
an
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<PAGE>
amount equal to three percent (3%) of Borrower's gross revenues from operations,
not including non-recurring items included in gross revenues, with a minimum
annual payment of $500,000 and a maximum annual payment of $2,000,000, or
(iv) payment for goods and services permitted under Section 6.12.
For purposes of this Section 6.13, an "Investment" in any Person
means any direct or indirect advance, loan or other extension of credit
(including, without limitation, by way of guarantee or similar arrangement; but
excluding installations of Equipment and advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as assets or
accounts receivable on the balance sheet of Borrower or any of its subsidiaries)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition of capital stock, bonds, notes,
debentures or other similar instruments issued by, such Person.
For purposes of this Section 6.13, a "Permitted Investment" means
(i) an Investment in a wholly owned subsidiary of Borrower or a Person which
will, upon the making of such Investment, become a wholly owned subsidiary or be
merged or consolidated with or into or transfer or convey all or substantially
all its assets to, Borrower or a wholly owned subsidiary of Borrower; provided
that such Person's primary business is related, ancillary or complementary to
the businesses of Borrower on the date of such Investment; (ii) an Investment in
a Person that is nonrecourse to Borrower or any of its subsidiaries and for
which Borrower receives reasonably equivalent value as determined in good faith
by Borrower's board of directors; or (iii) a Temporary Cash Investment.
For purposes of this Section 6.13, "Temporary Cash Investment" means
an investment in any of the following: (i) obligations issued or guaranteed by
the United States of America; (ii) certificates of deposit, bankers acceptances
and other "money market instruments" issued by any bank or trust company
organized under the laws of the United States of America or any state thereof
and having capital and surplus in an aggregate amount of not less than
$100,000,000; (iii) open market commercial paper bearing the highest credit
rating issued by Standard & Poor's Corporation or by another nationally
recognized credit rating agency; (iv) repurchase agreements entered into with
any bank or trust company organized under the laws of the United States of
America or any state thereof and having capital and surplus in an aggregate
amount of not less than $100,000,000 relating to United States of America
government obligations; and (v) shares of "money market funds," each having net
assets of not less than $100,000,000; in each case maturing or being due or
payable in full not more than 180 days after Borrower's acquisition thereof.
6.14 Merger, Consolidation and Sale of Assets. Borrower will not
----------------------------------------
consolidate with, merge with or into, or sell, convey, transfer, lease or
otherwise dispose of all or substantially all of its property and assets (as an
entirety or substantially an entirety in one transaction or a series of related
transactions) to, any Person (other than a consolidation or merger with or into
a wholly owned subsidiary with a positive net worth; provided that, in
connection with any such merger or consolidation, no consideration (other than
common stock in the surviving Person or Borrower) shall be issued or distributed
to the shareholders of Borrower) or permit any Person to merge with or into
Borrower unless: (i) Borrower shall be the continuing Person, or the Person (if
other than Borrower)
-12-
<PAGE>
formed by such consolidation or into which Borrower is merged or that acquired
or leased such property and assets of Borrower shall be a corporation organized
and validly existing under the laws of the United States of America or any
jurisdiction thereof; (ii) immediately after giving effect to such transaction,
no Event of Default shall have occurred and be continuing; and (iii) immediately
after giving effect to such transaction on a pro forma basis, Borrower or any
Person becoming the successor to Borrower shall have a consolidated EBITDA equal
to or greater than the consolidated EBITDA of Borrower immediately prior to such
transaction. The foregoing limitation shall not apply to (A) any sale, lease,
or other disposition of assets in the ordinary course of business, or (B) any
sale, lease, or other disposition of assets in an aggregate amount not exceeding
ten percent (10%) of the total assets of Borrower determined on a fair market
value basis so long as Borrower receives fair and reasonable consideration for
such assets as determined in good faith by Borrower's board of directors.
6.15 Limitation on Other Business. Borrower will not, during any
----------------------------
three month period, permit less than 90% of the total consolidated gross
revenues of Borrower and its subsidiaries, not including non-recurring items
included in gross revenues, for such period to be derived from the operation and
maintenance of its Business.
ARTICLE 7
---------
Events of Default
-----------------
7.1 Events of Default. Each of the following shall constitute an
-----------------
Event of Default under this Agreement:
(a) Bankruptcy. Borrower shall institute a voluntary case seeking
----------
liquidation or reorganization under Chapter 7 or Chapter 11, respectively, of
the United States Bankruptcy Code, or shall consent to the institution of an
involuntary case thereunder against it; or Borrower shall file a petition
initiating or shall otherwise institute any similar proceeding under any other
applicable federal or state law, or shall consent thereto; or Borrower shall
apply for, or by consent or acquiescence there shall be an appointment of, or a
decree or order of a court of competent jurisdiction shall have been issued for
the appointment of, a receiver, liquidator, sequestrator, trustee or other
officer with similar power; or Borrower shall make an assignment for the benefit
of creditors; or Borrower shall admit in writing its inability to pay its debts
generally as they become due; or, if an involuntary case shall be commenced
seeking the liquidation or reorganization of Borrower under Chapter 7 or Chapter
11, respectively, of the United States Bankruptcy Code, or any similar
proceeding shall be commenced against Borrower under any applicable federal or
state law, and (i) the petition commencing the involuntary case is not timely
controverted; or (ii) the petition commencing the involuntary case is not
dismissed within 30 days of its filing; or (iii) an interim trustee is appointed
to take possession of all or a portion of the property, to operate all or any
part of the business of Borrower; or (iv) an order for relief shall have been
issued or entered therein; provided, however, that none of the events described
in this Section 7.1(a) shall be deemed to be an Event of Default if upon the
happening of such event, or during the continuation of such event, Lender is
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<PAGE>
obligated to continue to perform under and has no right to terminate the
Equipment Sale Agreement, and in such event Lender shall be obligated to
continue to advance Loans under this Agreement in the amount of the purchase
price of Equipment purchased under the Equipment Sale Agreement or to make any
Permitted Third Party Equipment Purchase.
(b) Material Violation of Transaction Documents. Borrower shall
-------------------------------------------
(i) make any material unauthorized use of the Equipment in contravention of the
terms of the Equipment Sale Agreement, (ii) make any material unauthorized use
of the programming service in contravention of the Signal Availability
Agreement, (iii) fail to issue any of the Initial Stock, Conversion Stock,
Reconciliation Stock, or Option Stock to Lender in contravention of the
Transaction Documents, (iv) permit to occur any breach of the covenant contained
in Section 6.15 of this Agreement, (v) fail to make any payment to Lender
required under any of the Transaction Documents, subject to any notice and
opportunity to cure provisions with respect to any such payment obligations
contained in the Transaction Documents, or (vi) fail to consummate the
recapitalization required under and in accordance with the provisions of the
Stockholders' Agreement included in the Transaction Documents.
7.2 Termination of Commitment. If any Event of Default shall occur,
-------------------------
Lender shall have no obligation to make further Loans hereunder.
7.3 Other Remedies. If any Event of Default shall occur and be
--------------
continuing, Lender shall have, in addition to the remedies set forth in Section
7.2 hereof, all other remedies otherwise available at law or in equity.
ARTICLE 8
---------
Conversion
----------
8.1 Conversion by Lender. The Loans (including all accrued and
--------------------
unpaid interest) shall be convertible, in whole or in part, from time to time
into shares of the common stock of Borrower (the "Conversion Stock") in
accordance with the following provisions of this Section 8.1. In order to
exercise the conversion under this Section 8.1, Lender shall send a written
notice to Borrower that Lender is exercising such conversion as of a specified
date that shall be at least five business days, but not more than 30 days, from
the date upon which the notice is sent. Such notice shall specify the total
principal amount of the Loans to be converted.
(a) On or after the first anniversary of the Closing Date,
(i) if the principal amount of the Loans advanced under this
Agreement prior to such first anniversary is $1,405,785 or
less, the entire outstanding principal of and accrued
interest on the Loans will be convertible into shares of
common stock of Borrower that represent, immediately after
issuance of such shares, 1.3% of the issued and outstanding
common stock of Borrower, or (ii) if the principal amount of
the Loans advanced under this Agreement prior to such first
anniversary is more
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<PAGE>
than $1,405,785, the entire outstanding principal of and
accrued interest on the Loans will be convertible into
shares of common stock of Borrower that represent,
immediately after issuance of such shares, the percentage of
the issued and outstanding common stock of Borrower based on
the following calculation (the "Base Conversion Formula"):
( )
( ( Outstanding Principal + ) )
( ( of Loans $5,396,053 ) x 36.99 ) - 4.99
( ( ----------------------------------------- ) )
( ( $40,000,000 ) )
( )
(b) On or after the second anniversary of the Closing Date, (i)
if the principal amount of the Loans advanced under this
Agreement as of such second anniversary is $10,608,273 or
less, the entire outstanding principal of and accrued
interest on the Loans will be convertible into shares of the
common stock of Borrower so that, when combined with the
shares of the common stock of Borrower subscribed for by and
issued to Lender on the Closing Date (the "Initial Stock")
and the Conversion Stock issued upon any previous conversion
of the Loans under this Agreement (collectively, the
"Previously Issued Stock"), Lender will hold a total of
14.8% of the issued and outstanding common stock of
Borrower, or (ii) if the principal amount of the Loans
advanced under this Agreement as of such second anniversary
is more than $10,608,273, the entire outstanding principal
of and accrued interest on the Loans will be convertible
into shares of common stock of Borrower that represent,
immediately after issuance of such shares, the percentage of
the issued and outstanding common stock of Borrower based
upon the following calculation (the "Adjusted Conversion
Formula"):
Percentage Previously
Base Conversion Formula - Issued to Lender on
Prior Conversion
(c) On or after the third anniversary of the Closing Date, (i)
if the principal amount of the Loans advanced under this
Agreement as of such third anniversary is $22,600,703 or
less, the entire outstanding principal of and accrued
interest on the Loans will be convertible into shares of the
common stock of Borrower so that, when combined with the
Previously Issued Stock, Lender will hold shares of common
stock of Borrower that represent, immediately after issuance
of such shares, a total of 25.89% of the issued and
outstanding common stock of Borrower, or (ii) if the
principal amount of the Loans advanced under this Agreement
as of such third anniversary is more than $22,600,703, the
entire outstanding principal of and accrued interest on the
Loans will be convertible into shares of common stock of
Borrower that represent, immediately after issuance of such
shares, the percentage of the
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<PAGE>
issued and outstanding common stock of Borrower based on the
Adjusted Conversion Formula.
(d) On and after the fourth anniversary of the Closing Date, the
entire outstanding principal of and accrued interest on the
Loans will be convertible into shares of the common stock of
Borrower so that, when combined with the Previously Issued
Stock, Lender will hold shares of common stock of Borrower
that represent, immediately after issuance of such shares, a
total of 36.99% of the issued and outstanding common stock
of Borrower.
(e) For purposes of any conversion under paragraphs (a), (b),
(c), and (d) above, at all times there shall be deemed to be
at least $1.00 in outstanding principal on the Loans.
(f) In addition to the shares of Conversion Stock issuable to
Lender under the preceding provisions of this Section 8.1,
Borrower agrees to reserve and hold as Treasury Stock for
contingent issuance to Lender 152,750 additional shares of
the common stock of Borrower (subject to appropriate
adjustment in the event of any stock split, reverse stock
split, stock dividend, reclassification, subdivision,
recapitalization, combination, exchange of shares, or a
special dividend or distribution to holders of shares of
Borrower's common stock with respect to such shares as a
result of a disposition of assets, if the record date of
such stock split, reverse stock split, stock dividend,
reclassification, subdivision, recapitalization,
combination, exchange of shares, or special dividend or
distribution is after the date of this Agreement as first
above written but before the issuance of the Option Stock)
(the "Reconciliation Stock"). The intent of the parties in
reserving the Reconciliation Stock for issuance upon
exercise of the Option is to enable Lender, upon purchase or
acquisition of the Initial Stock, the Conversion Stock and
the Option Stock, to own shares of Borrower's common stock
equal to 50% of Borrower's outstanding common stock as of
the Closing Date (but determined after issuance of the
Initial Stock, the Conversion Stock, the Option Stock, and
the Reconciliation Stock), assuming for this purpose that
LodgeNet owns one million such shares and that no other
shares (or securities or instruments convertible into or
exchangeable for shares of common stock) have been issued.
The Reconciliation Stock shall be issued to Lender, without
further consideration payable by Lender, simultaneously with
the issuance of the Option Stock to Lender. If the Option
Agreement is terminated and the Option Warrant is not
required to be issued upon termination of the Option
Agreement or if the Option Warrant expires, in either case
without issuance of the Option Stock to Lender, the
Reconciliation Stock shall be cancelled by Borrower.
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<PAGE>
(g) If this Agreement is terminated prior to Lender advancing to
Borrower the full amount of the Commitment, then Lender
acknowledges and agrees that any shares of Conversion Stock
that have been issued or are issuable to Lender in excess of
the number of shares of Conversion Stock that would have
been issued or would be issuable to Lender based upon the
issuance of Conversion Stock representing, immediately after
such issuance, one percent of the issued and outstanding
common stock of Borrower, determined based upon the intent
of the parties and the assumptions set forth in the second
sentence of Section 8.1(f), for each $1,081,373.30 in Loans
advanced hereunder may be cancelled by Borrower for failure
of consideration.
(h) If any event occurs, including, without limitation, the
issuance of additional shares of capital stock by Borrower
or the issuance of any debt or equity securities convertible
or exchangeable into shares of capital stock of Borrower, as
to which in the reasonable opinion of Borrower or Lender, in
good faith, after consideration of the effect and purposes
of the preemptive rights available to LodgeNet and Lender
under the Stockholders' Agreement, the other provisions of
this Section 8.1 are not strictly applicable but the lack of
an adjustment to the number of shares of Conversion Stock or
Reconciliation Stock to be issued to Lender would not fairly
protect the rights of Lender, Borrower, or LodgeNet in
accordance with the basic intent and principles of the
provisions of this Section 8.1, or if strictly applicable,
would not fairly protect the rights of Lender, Borrower, or
LodgeNet in accordance with the basic intent and principles
of the provisions of this Section 8.1, then Borrower and
Lender will negotiate in good faith regarding the
appropriate adjustment to the number of shares of Conversion
Stock or Reconciliation Stock to be issued to Lender
consistent with the basic intent and principles established
in the other provisions of this Section 8.1. If Borrower and
Lender are unable to agree on an appropriate adjustment
within 30 days, then Borrower shall appoint a firm of
certified public accountants (which may be the regular
auditors of Borrower) of recognized national standing, which
shall give their opinion on the adjustment, if any, to the
number of shares of Conversion Stock or Reconciliation Stock
to be issued to Lender, on a basis consistent with the basic
intent and principles established in the other provisions of
this Section 8.1. Upon receipt of such opinion, Borrower,
Lender, and LodgeNet shall forthwith make the adjustments
described therein.
(i) Borrower and Lender agree that Schedule 8.1 sets forth
examples of the calculations contained in the provisions of
this Section 8.1 that reflect the basic intent and
principles of the provisions of this Section 8.1.
8.2 Effect of Conversion. On each Conversion Date, Borrower shall
--------------------
deliver to Lender a certificate representing the number of shares of common
stock of Borrower issued to Lender on
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<PAGE>
such Conversion Date based upon Lender's exercise of the conversion as provided
in Section 8.1. In the event and to the extent that Lender exercises the
conversion, the principal amount of the Loans as to which Lender exercises the
conversion (and all accrued and unpaid interest on such principal) shall be
deemed repaid by Borrower to Lender. In the event that Lender exercises the
conversion, the parties to this Agreement agree to execute all documents
necessary to reflect the effect of the exercise of such conversion and the
repayment of such Loans (and all accrued and unpaid interest thereon) as
described in the preceding sentence.
8.3 Limitation on Conversion Rights. Lender shall not convert all or
-------------------------------
any part of the Loans into Conversion Stock to the extent that such conversion
would cause Borrower or Lender to violate any Governmental Requirement,
including, without limitation, a violation of 47 U.S.C. (S) 533(a)(2), or any
successor statute, or any regulations of the FCC promulgated thereunder if any
SMATV service offered by Borrower continued to be offered after such conversion
separate and apart from any applicable franchised cable service (the "Regulatory
Restrictions"), and any purported conversion by Lender under Section 8.1 that
would result in a violation of the Regulatory Restrictions shall be deemed null
and void.
8.4 MANDATORY CONVERSION. LENDER SHALL BE OBLIGATED TO CONVERT THE
--------------------
LOANS INTO CONVERSION STOCK IN FULL IN ACCORDANCE WITH SECTION 8.1 AT ANY TIME
THAT SUCH CONVERSION WOULD NOT VIOLATE ANY GOVERNMENTAL REQUIREMENT, INCLUDING
THE REGULATORY RESTRICTIONS.
ARTICLE 9
---------
Warrant
-------
9.1 Issuance of Warrant. On the Maturity Date (subject to the
-------------------
Extension), if Lender has not fully exercised the conversion right under Section
8.1, Borrower shall issue to Lender a warrant to acquire the number of shares of
the common stock of Borrower equal to the unconverted portion of the Conversion
Stock (the "Conversion Warrant"). The Conversion Warrant shall be in the form
of Exhibit B to this Agreement.
9.2 Effect of Issuance of Warrant. Upon issuance of the Conversion
-----------------------------
Warrant by Borrower to Lender, all principal of (and accrued and unpaid interest
on) the Loans shall be cancelled and shall be deemed repaid in full by Lender.
Upon delivery of the Conversion Warrant by Borrower to Lender, the parties to
this Agreement agree to execute all documents necessary to reflect the effect of
issuance of the Conversion Warrant and the repayment of the Loans (and all
accrued and unpaid interest thereon) as described in the preceding sentence.
9.3 Transferability of Warrant. The Conversion Warrant may be
--------------------------
transferred only in accordance with its terms and only simultaneously with and
to the same Person to whom the Option
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<PAGE>
Warrant (if the Option Warrant is issued, unless the Option Warrant has been
previously terminated or is terminated simultaneously with the transfer of the
Conversion Warrant) is transferred.
ARTICLE 10
----------
Further Assurances
------------------
From time to time after the date hereof and without further
consideration, Borrower and Lender will execute and deliver, or arrange for the
execution and delivery of, such other instruments or documents and take or
arrange for such other actions as may reasonably be requested to give full
effect to this Agreement and the Transaction Documents.
ARTICLE 11
----------
Miscellaneous
-------------
11.1 Successors and Assigns. Neither Lender nor Borrower may assign
----------------------
any of its rights or delegate any of its duties hereunder without the prior
written consent of the other; provided that either Lender or Borrower may assign
this entire Agreement to an Affiliate of such Person or to a Person that
acquires all or substantially all of the assets or business of such Person if
such Person gives prior written notice to the other party and delivers an
assumption agreement of such assignee in form and substance reasonably
satisfactory to the other party pursuant to which such assignee assumes the
obligations of the assigning party under this Agreement. Each of Lender and
Borrower agrees that it will cause any acquiror of all or substantially all of
the assets or business of such Person to assume this Agreement. Subject to the
foregoing, this Agreement shall be binding upon and shall inure to the benefit
of the Lender and Borrower, their respective successors and permitted assigns.
For purposes of this Section 11.1, "assign" shall mean to directly or indirectly
sell, assign, convey, lease, sublease or permit the use of, in any manner, any
rights or obligations under this Agreement.
11.2 No Implied Waiver. Either party's failure to enforce any
-----------------
provision of this Agreement shall not in any way be construed as a waiver of any
such provision as to any future violations thereof or prevent that party
thereafter from enforcing each and every other provision of this Agreement. No
waiver of any right or remedy hereunder shall be effective unless contained in a
writing signed by the waiving party. The rights granted to the parties herein
are cumulative and the waiver by a party of any single remedy shall not
constitute a waiver of such party's right to assert all other legal remedies
available to it under the circumstances.
11.3 Amendments; Waivers. No amendment, modification or waiver of,
-------------------
or consent with respect to, any provision of this Agreement shall be effective
unless the same shall be in writing and signed and delivered by Borrower and
Lender. Any amendment, modification, waiver or consent hereunder shall be
effective only in the specific instance and for the specific purpose for which
given.
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<PAGE>
11.4 Severability. If any portion or portions of this Agreement
------------
shall be deemed, for any reason, invalid or unenforceable, the remaining portion
or portions shall nevertheless be valid, enforceable, and in effect, unless such
remaining portion or portions are not reasonably adequate to accomplish the
basic purposes and intent of the parties.
11.5 Notices. All notices, demands, requests, or other
-------
communications which may be or are required to be given, served, or sent by one
party to the other party pursuant to this Agreement (except as otherwise
specifically provided in this Agreement) shall be in writing and shall be
delivered personally, by overnight messenger or mailed by first-class certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to ResNet: 808 West Avenue North
Sioux Falls, South Dakota 57104
Attn: Chief Operating Officer
Telephone: (605) 330-1330
With a copy similarly addressed to the
attention of Eric R. Jacobsen, Vice President
and General Counsel
With a copy to: Pillsbury Madison & Sutro L.L.P.
235 Montgomery Street
San Francisco, California 94104
Attn: Gregg F. Vignos, Esq.
Telephone: (415) 983-1649
If to TCI-Satellite: 8085 South Chester Street
Suite 300
Englewood, Colorado 80112
Attn: Toby DeWeese
Telephone: (303) 712-4725
With a copy similarly addressed to the
attention of Corporate Counsel
Telephone: (303) 712-4618
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<PAGE>
With a copy to: Sherman & Howard L.L.C.
633 Seventeenth Street
Suite 3000
Denver, Colorado 80202
Attn: Peggy Knight, Esq.
Telephone: (303) 299-8140
Either party may designate by notice in writing a new address or
addressee to which any notice, demand, request, or communication may thereafter
be so given, served or sent. Each notice, demand, request, or communication
shall be deemed sufficiently given, served, sent or received for all purposes at
such time as it is delivered to the addressee named above as to each party, with
the signed messenger receipt, return receipt, or the delivery receipt being
deemed conclusive evidence of such delivery, or at such time as delivery is
refused by the addressee upon presentation.
11.6 Construction. All documentation, notices, reports and
------------
correspondence under this Agreement shall be submitted and maintained in the
English language. As used herein, the singular shall include the plural and the
plural may refer only to the singular. The use of any gender shall be
applicable to all genders. The captions contained herein are for purpose of
convenience only and are not part of the Agreement. Unless otherwise specified,
all references to Sections and Exhibits in this Agreement are references to
Sections of, and Exhibits to, this Agreement.
11.7 Survival. Termination or expiration of this Agreement for any
--------
reason shall not release either party from any liabilities or obligations set
forth in this Agreement which the parties have expressly agreed shall survive
any termination or expiration, or remain to be performed or by their nature
would be intended to be applicable following any such termination or expiration.
11.8 Governing Law; Choice of Forum. This Agreement shall be
------------------------------
governed and interpreted by the laws of the State of Delaware, without regard to
its conflict of law rules. The parties agree that all litigation relating to
this Agreement shall be brought in the state and federal courts of appropriate
subject matter jurisdiction in Delaware and each party hereby submits itself to
the non-exclusive in personam jurisdiction of such courts for purposes of any
such litigation. Neither party shall object to venue in such courts on the
grounds of an inconvenient forum or otherwise. In the event of any litigation
between the parties relating to this Agreement, the prevailing party shall be
entitled to recover, in addition to any other relief awarded by the court, its
reasonable attorneys fees and other costs of preparing for and participating in
the litigation, including all appeals.
11.9 Integration. This Agreement, together with all exhibits,
-----------
schedules, appendices, and other attachments, expresses the understanding of the
parties thereto and supersedes all prior agreements, whether oral or written,
relating to the subject matters specifically expressed herein; provided,
however, that the parties acknowledge that simultaneously with the execution of
this Agreement they or their affiliates are entering into the Equipment Sale
Agreement, a Subscription Agreement, the Signal Availability Agreement, the
Option Agreement, a Stockholders' Agreement, and a Standstill Agreement, which
documents are related to this Agreement in that they collectively
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<PAGE>
document a transaction between the parties of which this Agreement is a part
(collectively, the "Transaction Documents").
11.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts each of which shall be an original with the same effect as if the
signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
RESNET COMMUNICATIONS, INC. TCI SATELLITE ENTERTAINMENT, INC.
By: By:
------------------------------ --------------------------------
Name: Name:
---------------------------- --------------------------------
Title: Title:
--------------------------- -----------------------------
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<PAGE>
EXHIBIT 10.14
OPTION AGREEMENT
BETWEEN
RESNET COMMUNICATIONS, INC.
AND
TCI SATELLITE ENTERTAINMENT, INC.
Dated as of October 21, 1996
<PAGE>
EXECUTION COPY
OPTION AGREEMENT
----------------
This OPTION AGREEMENT (this "Agreement") is entered into as of October
21, 1996, by and between ResNet Communications, Inc., a Delaware corporation
("ResNet"), and TCI Satellite Entertainment, Inc., a Delaware corporation ("TCI-
Satellite") (each of TCI-Satellite and ResNet being referred to herein
individually as a "Party" and together as the "Parties").
RECITALS
--------
A. Simultaneously with the execution of this Agreement, the Parties
are entering into a Subscription Agreement (the "Subscription Agreement")
pursuant to which TCI-Satellite is purchasing from ResNet, and ResNet is issuing
to TCI-Satellite, 52,520 shares of the common stock of ResNet, which shares
represent, immediately after such issuance, 4.99% of the issued and outstanding
common stock of ResNet (the "Initial Stock").
B. Simultaneously with the execution of this Agreement, the Parties
are entering into a Subordinated Convertible Term Loan Agreement (the "Loan
Agreement") between TCI-Satellite, as lender, and ResNet, as borrower, the loans
under which are convertible under certain circumstances into common stock of
ResNet (the "Conversion Stock").
C. ResNet wishes to grant to TCI-Satellite an option to acquire
260,200 additional shares of common stock of ResNet, as such number of shares
may be adjusted in accordance with the terms of this Agreement, that when
combined with the Initial Stock, the Conversion Stock, and certain additional
stock that will be issued to TCI-Satellite under the terms of the Loan Agreement
or the Conversion Warrant upon exercise of the option granted hereunder (the
"Reconciliation Stock") will give TCI-Satellite the right to acquire shares of
common stock of ResNet representing, immediately after issuance of all such
shares, assuming no issuance of any additional equity in ResNet other than the
Initial Stock, the Conversion Stock, the Reconciliation Stock, and the Option
Stock, 50% of the issued and outstanding common stock of ResNet on a fully
diluted basis, and TCI-Satellite wishes to obtain such an option, all on the
terms and conditions set forth herein.
AGREEMENT
---------
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Parties hereby agree as follows:
1. Definitions.
-----------
For purposes of this Agreement, the following terms shall have the following
meanings:
<PAGE>
"Affiliate" of any Person at any time shall mean any other Person
---------
directly or indirectly controlling, controlled by or under common control with
such Person at such time; with "control" for such purposes meaning ownership of
securities representing at least 75% of the economic interests in and 75% of the
voting power of a Person.
"Agreement" shall mean this Option Agreement, including any exhibits
---------
and attachments hereto, as amended from time to time.
"Certificate" shall have the meaning specified in Section 2(d).
-----------
"Conversion Stock" shall have the meaning specified in Recital B.
----------------
"Conversion Warrant" shall have the meaning specified in Section 2(e).
------------------
"Final ResNet Fair Market Value" shall have the meaning specified in
------------------------------
Section 2.1(b)(i).
"Governmental Authority" shall mean any federal, state, municipal or
----------------------
local governmental authority or political subdivision thereof.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
-------
of 1976, as amended, and the rules and regulations thereunder, as in effect from
time to time.
"Initial Stock" shall have the meaning specified in Recital A.
-------------
"Investment Company Act" shall mean the Investment Company Act of
----------------------
1940, as amended, and the rules and regulations thereunder as in effect from
time to time.
"Legal Requirement" shall mean the requirements of any law, ordinance,
-----------------
statute, rule, regulation, code, order, judgment, decree, injunction, franchise,
determination, approval, permit, license, authorization or other requirement of
any Governmental Authority.
"Lien" shall mean any mortgage, lien, pledge, charge, claim, security
----
interest or encumbrance of any kind.
"Loan Agreement" shall have the meaning specified in Recital B.
--------------
"LodgeNet" shall mean LodgeNet Entertainment Corporation, a Delaware
--------
corporation, including any successor corporation.
"1933 Act" shall mean the Securities Act of 1933, as amended, and the
--------
rules and regulations thereunder as in effect from time to time.
"Option" shall have the meaning specified in Recital C.
------
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<PAGE>
"Option Notice" shall have the meaning specified in Section 2(c).
-------------
"Option Stock" shall have the meaning specified in Section 2(a).
------------
"Option Warrant" shall have the meaning specified in Section 2(e).
--------------
"Other Property" shall have the meaning specified in Section 2(g)(ii).
--------------
"Parties" and "Party" shall have the meanings specified in the
------- -----
Preamble.
"Person" shall mean and include an individual, a corporation, a
------
partnership (general, limited or limited liability), a joint venture, a limited
liability company, an association, a trust or any other organization or entity,
including a Governmental Authority.
"Preliminary ResNet Fair Market Value" shall have the meaning
------------------------------------
specified in Section 2.1(b)(i).
"Purchase Price" shall have the meaning specified in Section 2(b).
--------------
"Reconciliation Stock" shall have the meaning specified in Recital C.
--------------------
"Regulatory Restrictions" shall have the meaning specified in
-----------------------
Section 2(f).
"ResNet" shall have the meaning specified in the Preamble.
------
"Subscription Agreement" shall have the meaning specified in
----------------------
Recital A.
"TCI-Satellite" shall have the meaning specified in the Preamble.
-------------
"Transaction Documents" shall have the meaning specified in
---------------------
Section 8(j).
2. Option to Purchase Stock.
------------------------
(a) Grant of Option. Upon the terms and subject to the conditions set
---------------
forth in this Agreement, ResNet hereby grants to TCI-Satellite an irrevocable
option (the "Option") to purchase the Option Stock. In no event shall TCI-
Satellite have the right to acquire in excess of 50% of the issued and
outstanding common stock of ResNet, taking into account the Initial Stock, the
Conversion Stock, the Reconciliation Stock, and the Option Stock on a combined
basis.
(b) The purchase price for the Option Stock (the "Purchase Price")
shall be determined in accordance with the following procedures:
(i) TCI-Satellite and ResNet each shall select a nationally recognized
investment banker who shall determine, within 30 days after selection, the net
fair market value of ResNet on a
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<PAGE>
going concern basis, as of the date of exercise of the Option, taking into
account all indebtedness of ResNet (including any guarantees of indebtedness for
borrowed money) and the current assets and current liabilities of ResNet, based
upon a transaction negotiated on an arms'-length basis between a willing buyer
and willing seller, with neither having any compulsion to buy or sell and with
each party having full knowledge of all of the facts and circumstances of
ResNet's business and properties (the "Preliminary ResNet Fair Market Value").
If the Preliminary ResNet Fair Market Value determinations of the two investment
bankers vary by more than 10%, such investment bankers shall select a third
nationally recognized investment banker who shall make an independent
determination of the Preliminary ResNet Fair Market Value within 30 days after
being selected. The final determination of the net fair market value of ResNet
(the "Final ResNet Fair Market Value") will be the average of the Preliminary
ResNet Fair Market Value determination of such third investment banker and the
Preliminary ResNet Fair Market Value determination of the one of the first two
investment bankers that is closest to the Preliminary ResNet Fair Market Value
determination of such third investment banker.
(ii) The Purchase Price shall be determined by the two investment
bankers whose valuations determined the Final ResNet Fair Market Value by
multiplying (A) the sum of (1) the Final ResNet Fair Market Value, and (2) the
Purchase Price, by (B) a fraction the numerator of which is the number of shares
of Option Stock to be issued to TCI-Satellite pursuant to exercise of the Option
and the denominator of which is the total number of shares of issued and
outstanding common stock of ResNet (including the number of shares of Option
Stock to be issued to TCI-Satellite pursuant to exercise of the Option and
assuming prior issuance of the maximum number of shares of Conversion Stock and
Reconciliation Stock), and adjusting the resulting product as such investment
bankers determine to be appropriate to reflect any control premium or discount
for lack of marketability associated with the issuance of the Option Stock to
TCI-Satellite pursuant to exercise of the Option, provided that if such
investment bankers do not agree on the appropriate amount of any control premium
or discount for lack of marketability associated with the issuance of the Option
Stock to TCI-Satellite pursuant to exercise of the Option, then any such premium
or discount shall be determined by averaging the determinations of such
investment bankers.
(iii) ResNet shall pay the fees and expenses of the investment banker
selected by it, TCI-Satellite shall pay the fees and expenses of the investment
banker selected by it, and ResNet and TCI-Satellite each shall pay one-half of
the fees and expenses of any third investment banker selected by the first two
investment bankers; provided, however, that if TCI-Satellite elects not to
purchase the Option Stock after the determination of the Purchase Price, TCI-
Satellite shall pay all fees and expenses of both or all three of the investment
bankers, as applicable, and TCI-Satellite shall have no other obligation or
liability with respect to its decision not to purchase the Option Stock.
(c) Manner of Exercise. TCI-Satellite shall exercise the Option by
------------------
delivering a written notice of exercise (the "Option Notice") to ResNet;
provided, however, that TCI-Satellite may rescind its notice of exercise by
delivering to ResNet a written notice of rescission within 30 days after the
determination of the Purchase Price in accordance with Section 2(b), subject to
the provisions of Section 2(b)(iii).
-4-
<PAGE>
(d) Payment of Purchase Price; Issuance of Shares. The Purchase Price
---------------------------------------------
shall be payable on the date selected by TCI-Satellite that is within 30 days
after the date of the Option Notice, subject to obtaining any required approval
from a Governmental Authority, including compliance with the HSR Act, by wire
transfer of immediately available funds to an account that has been designated
by written notice by ResNet to TCI-Satellite. Notwithstanding the preceding
sentence, in ResNet's sole discretion, the Purchase Price may be paid in whole
or in part in property or services mutually acceptable to ResNet and TCI-
Satellite in lieu of cash. Upon receipt of the Purchase Price, ResNet shall
issue and deliver a certificate (the "Certificate") in the name of TCI-Satellite
for the shares of the Option Stock to be issued pursuant to exercise of the
Option, and the Parties will execute and deliver a cross-receipt for the
Purchase Price and the Option Stock.
(e) Time for Exercise and Lapse of Option. The Option may be
-------------------------------------
exercised at any time for all of the Option Stock on or after 60 days after the
third anniversary of the date first above written. The Option shall lapse if not
previously exercised upon the Maturity Date (including any Extension thereof)
under and as defined in the Loan Agreement; provided, however, that if on such
Maturity Date under the Loan Agreement, ResNet issues to TCI-Satellite a warrant
to acquire the number of shares of common stock of ResNet equal to the
unconverted portion of the Conversion Stock (the "Conversion Warrant"), then
ResNet, also shall issue to TCI-Satellite, on the same date as issuance of the
Conversion Warrant, a warrant to acquire the number of shares of common stock of
ResNet equal to the unexercised portion of the Option Stock (the "Option
Warrant"). The Option Warrant shall be in the form of Exhibit A to this
Agreement and shall provide that (i) TCI-Satellite may acquire the Option Stock
not previously acquired by TCI-Satellite by exercise of the Option hereunder if
TCI-Satellite was prevented from acquiring such Option Stock due to the
Regulatory Restrictions for consideration equal to the Purchase Price for such
Option Stock hereunder assuming an exercise of the Option on the date of
issuance of the Option Warrant for a period of nine months thereafter and for
consideration equal to the Purchase Price determined at the time of exercise of
the Option Warrant for an additional two-year period, (ii) TCI-Satellite may
transfer the Option Warrant together with, but not separately from, the
Conversion Warrant, subject to a right of first refusal by LodgeNet, and (iii)
the Option Warrant either must be exercised to acquire the Option Stock
simultaneously with exercise of the Conversion Warrant or the Option Warrant
will be terminated upon exercise of the Conversion Warrant without a
simultaneous exercise of the Option Warrant and in any event the Option Warrant
will expire two years and nine months after the date of issuance if not
previously exercised.
(f) Limitation on Exercise of Option. TCI-Satellite will not exercise
--------------------------------
the Option to the extent that such exercise would cause ResNet or TCI-Satellite
to violate any Legal Requirement, including, without limitation, a violation of
47 U.S.C. (S) 533(a)(2) or any regulations of the FCC promulgated thereunder if
any SMATV service offered by ResNet continued to be offered after such exercise
of the Option separate and apart from any applicable franchised cable service
(the "Regulatory Restrictions"), and any purported exercise of the Option that
would result in a violation of the Regulatory Restrictions shall be deemed null
and void. TCI-Satellite shall have the right, but shall have no obligation, to
exercise the Option at any time permitted under Section 2(e) that such exercise
would not violate the Regulatory Restrictions.
-5-
<PAGE>
(g) Adjustment. The number of shares of Option Stock issuable upon
----------
exercise of the Option under this Agreement shall be subject to adjustment from
time to time as follows:
(i) Stock Dividends, Subdivisions and Combinations. If at
any time ResNet shall:
(A) take a record of the holders of its common stock for
the purpose of entitling them to receive a dividend payable in, or other
distribution of, shares of common stock,
(B) subdivide its outstanding shares of common stock
into a larger number of shares of common stock, or
(C) combine its outstanding shares of common stock into
a smaller number of shares of common stock,
then the number of shares of Option Stock issuable upon exercise of the Option
immediately after the happening of any such event shall be adjusted to consist
of the number of shares of common stock which a record holder of the number of
shares of Option Stock issuable upon exercise of the Option immediately prior to
the happening of such event would own or be entitled to receive after the
happening of such event.
(ii) Reorganization, Reclassification, Merger, Consolidation
-------------------------------------------------------
or Disposition of Assets. If at any time ResNet shall reorganize its capital,
- ------------------------
reclassify its capital stock, consolidate with or merge into another corporation
(where ResNet is not the surviving corporation), or sell, transfer or otherwise
dispose of all or substantially all its property, assets or business to another
corporation and, pursuant to the terms of such reorganization, reclassification,
merger, consolidation or disposition of assets, shares of common stock of the
successor or acquiring corporation, or any cash, shares of stock or other
securities or property of any nature whatsoever (including warrants or other
subscription or purchase rights) in addition to or in lieu of common stock of
the successor or acquiring corporation ("Other Property"), are to be received by
or distributed to the holders of common stock of ResNet, then TCI-Satellite
shall have the right thereafter to receive, upon exercise of the Option, the
number of shares of common stock of the successor or acquiring corporation and
Other Property receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets by a holder of
the number of shares of Option Stock issuable upon exercise of the Option
immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation shall expressly assume the due and punctual observance
and performance of each and every covenant and condition of this Agreement to be
performed and observed by ResNet and all the obligations and liabilities
hereunder, subject to such modifications as may be deemed appropriate (as
determined by resolution of the Board of Directors of ResNet) in order to
provide for adjustments to the number of shares of Option Stock issuable upon
exercise of the Option which shall be as nearly equivalent as practicable to the
adjustments provided for in this Section 2(g). For purposes of this subsection
2(g)(ii), "common stock of the successor or acquiring corporation" shall include
stock of such corporation of any class which is not preferred as to dividends or
assets over any other class of stock
-6-
<PAGE>
of such corporation and which is not subject to redemption and shall also
include any evidences of indebtedness, shares of stock or other securities which
are convertible into or exchangeable for any such stock, either immediately or
upon the arrival of a specified date or the happening of a specified event and
any warrants or other rights to subscribe for or purchase any such stock.
(iii) Certain Events. If any event occurs as to which in the
--------------
reasonable opinion of ResNet, in good faith, the other provisions of this
Section 2(g) are not strictly applicable but the lack of any adjustment would
not in the opinion of ResNet fairly protect the purchase rights of TCI-Satellite
in accordance with the basic intent and principles of such provisions, or if
strictly applicable would not fairly protect the purchase rights of TCI-
Satellite in accordance with the basic intent and principles of such provisions,
then ResNet shall appoint a firm of independent certified public accountants
(which may be the regular auditors of ResNet) of recognized national standing,
which shall give their opinion upon the adjustment, if any, on a basis
consistent with the basic intent and principles established in the other
provisions of this Section 2(g), necessary to preserve, without dilution, the
exercise rights of TCI-Satellite with respect to the Option. Upon receipt of
such opinion, ResNet shall forthwith make the adjustments described therein.
(iv) Successive Adjustments. Any adjustments required by this
----------------------
Section2(g) shall be made, to the extent applicable, successively whenever any
event described in this Section 2(g) shall occur.
3. Representations and Warranties of TCI-Satellite.
-----------------------------------------------
TCI-Satellite represents and warrants to ResNet that:
(a) It (i) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, (ii) is authorized to
transact business and is in good standing in each state in which its ownership
of assets or conduct of business requires such qualification, and (iii) has all
corporate powers required to carry on its business as conducted on the date
hereof, with such exceptions to clauses (ii) and (iii) as would not have a
material adverse effect on the ability of TCI-Satellite to perform its
obligations under this Agreement or under the Transaction Documents.
(b) The execution, delivery and performance by it of this Agreement
and the Transaction Documents are within its corporate powers and have been duly
authorized by all necessary corporate action on its part. Each Person executing
this Agreement and the Transaction Documents on behalf of TCI-Satellite is fully
authorized to execute and deliver the same.
(c) The execution, delivery and performance by it of this Agreement
and the Transaction Documents require no material action by or in respect of, or
filing with, any Governmental Authority other than those that have been obtained
or made and are in full force and effect.
(d) No consent by any Person under any contract to which it is a party
or to which its assets are subject is required or necessary for the execution,
delivery and performance by it of this
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<PAGE>
Agreement and the Transaction Documents, with such exceptions as would not have
a material adverse effect on the ability of TCI-Satellite to perform its
obligations under this Agreement or under the Transaction Documents.
(e) The execution, delivery and performance by it of this Agreement
and the Transaction Documents do not and will not (x) contravene its certificate
of incorporation or bylaws or (y) result in or constitute a breach or default
(including any event that, with the passage of time or giving of notice, or
both, would become a breach or default) under any applicable Legal Requirement
or any judgment, order, decree, contract, license, lease, indenture, mortgage,
loan agreement, note, security agreement or other agreement or instrument to
which it is a party or by which any of its properties may be bound, the effect
of which would be to cause a material adverse effect on the ability of TCI-
Satellite to perform its obligations under this Agreement or under the
Transaction Documents.
(f) This Agreement has been duly executed and delivered by it and
constitutes its valid and binding obligation, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or by the principles governing the availability of
equitable remedies.
(g) There is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of
TCI-Satellite or any of its Affiliates who might be entitled to any fee or
commission from ResNet or any of its Affiliates in connection with the
execution, delivery and performance of this Agreement or the Transaction
Documents.
(h) TCI-Satellite is acquiring the Option Stock for its own account,
not as a nominee or agent, for investment purposes only and not with a view to
or for the resale, distribution or fractionalization thereof, in whole or in
part.
(i) TCI-Satellite acknowledges that the offer and sale of the Option
Stock to it has not been accomplished by any form of general solicitation or
general advertising, including, but not limited to, any advertisement, article,
notice or other communication published in any newspaper, magazine or similar
media, or broadcast over television or radio and any seminar or meeting whose
attendees have been invited by any general solicitation or general advertising.
(j) TCI-Satellite acknowledges its understanding that the offering and
sale of the Option Stock is intended to be exempt from registration under the
1993 Act by virtue of section 4(2) of the 1933 Act and the provisions of Rule
506 of Regulation D promulgated thereunder. In furtherance thereof, TCI-
Satellite acknowledges that:
(i) It has the financial ability to bear the economic risk of its
investment in the Option Stock (including its possible loss), has adequate
means for providing for its current needs and contingencies and has no need
for liquidity with respect to its investment in the Option Stock;
-8-
<PAGE>
(ii) It has such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of an investment
in the Option Stock and protecting its own interests in connection with the
investment and has obtained, in its judgment, sufficient information from
ResNet to evaluate the merits and risks of an investment in the Option
Stock, and it has not utilized any Person as its purchaser representative in
connection with evaluating such merits and risks; and
(iii) It is an "accredited investor" within the meaning of Regulation
D promulgated under the 1933 Act.
(k) TCI-Satellite acknowledges that:
(i) It has been furnished any documents it has requested, has
carefully read any such documents and understands and has evaluated the
risks of a purchase of the Option Stock, and has relied solely (except as
indicated in subsections (ii) and (iii) below) on the information contained
in any such documents;
(ii) It has been provided an opportunity to obtain any additional
information concerning the Option Stock and ResNet;
(iii) It has been given the opportunity to ask questions of, and
receive answers from, representatives of ResNet concerning the terms and
conditions of the Option and other matters pertaining to this investment,
and has been given the opportunity to obtain such additional information
necessary to verify the accuracy of the information which was provided in
order for it to evaluate the merits and risks of an investment in the Option
Stock to the extent ResNet possesses such information or can acquire it
without unreasonable effort or expense, and has not been furnished any other
offering literature or prospectus except as mentioned herein; and
(iv) It has determined that the Option Stock is a suitable investment
for it and that at this time it could bear a complete loss of its
investment.
(l) TCI-Satellite agrees that it will not sell or otherwise transfer
the Option Stock without registration under the 1993 Act or an exemption
therefrom, and fully understands and agrees that it must bear the economic risk
of its investment for an indefinite period of time because, among other reasons,
the Option Stock will not be registered under the 1993 Act or under the
securities laws of certain states and, therefore, cannot be resold, pledged,
assigned or otherwise disposed of unless the Option Stock is subsequently
registered under the 1933 Act and under the applicable securities laws of such
states or an exemption from such registration is available. TCI-Satellite
understands that ResNet is under no obligation to register the Option Stock on
its behalf or to assist it in complying with any exemption from registration
under the 1933 Act or any applicable state securities laws. TCI-Satellite also
understands that sales or transfers of the Options Stock are further restricted
by the provisions of the Stockholders' Agreement included in the Transaction
Documents.
-9-
<PAGE>
(m) There are no suits, claims, grievances, actions, proceedings, or
governmental investigations pending or, to the best knowledge of TCI-Satellite,
threatened against or affecting TCI-Satellite which (i) seek to restrain or
enjoin the consummation of the transactions contemplated by this Agreement or
the Transaction Documents or (ii) might have a material adverse effect on the
ability of TCI-Satellite to perform its obligations under this Agreement or
under the Transaction Documents. TCI-Satellite is not in violation of any term
of any judgment, decree, injunction, or order to which it is subject, which
violation could have a material adverse effect on the ability of TCI-Satellite
to perform its obligations under this Agreement or under the Transaction
Documents.
4. Representations and Warranties of ResNet.
----------------------------------------
ResNet represents and warrants to TCI-Satellite that:
(a) It (i) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, (ii) is authorized to
transact business and is in good standing in each state in which its ownership
of assets or conduct of business requires such qualification, and (iii) has all
corporate powers required to carry on its business as conducted on the date
hereof and as proposed to be conducted, with such exceptions to clauses (ii) and
(iii) as would not have a Material Adverse Effect on ResNet or a material
adverse effect on the ability of ResNet to perform its obligations under this
Agreement or under the Transaction Documents.
(b) The execution, delivery, and performance by it of this Agreement
and the Transaction Documents are within its corporate powers and have been duly
authorized by all necessary corporate action on its part. Each Person executing
this Agreement and the Transaction Documents on behalf of ResNet is fully
authorized to execute and deliver the same.
(c) The execution, delivery and performance by it of this Agreement
and the Transaction Documents require no material action by or in respect of, or
material filing with, any Governmental Authority other than those that have been
obtained or made and are in full force and effect.
(d) No consent by any Person under any contract to which it or
LodgeNet is a party or to which their respective assets are subject is required
or necessary for the execution, delivery and performance by it of this Agreement
and the Transaction Documents, except those set forth on Schedule 4(d) all of
which have been obtained and are in full force and effect.
(e) The execution, delivery and performance by it of this Agreement
and the Transaction Documents do not and will not (x) contravene its certificate
of incorporation or bylaws or (y) result in or constitute a breach or default
(including any event that, with the passage of time or giving of notice, or
both, would become a breach or default) under any applicable Legal Requirement
or any judgment, injunction, order, decree, contract, license, lease, indenture,
mortgage, loan agreement, note or other agreement or instrument to which it is a
party or by which any of its properties may be bound, the effect of which would
be to cause a Material Adverse Effect on ResNet or a material
-10-
<PAGE>
adverse effect on the ability of ResNet to perform its obligations under this
Agreement or under the Transaction Documents.
(f) This Agreement has been duly executed and delivered by it
constitutes its valid and binding obligation, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or by the principles governing the availability of
equitable remedies.
(g) LodgeNet and ResNet are being represented in connection with the
transactions contemplated by the Transaction Documents by Paine Webber, Inc.,
and LodgeNet will be responsible for payment of all fees and expenses in
connection with such representation. There is no investment banker, broker,
finder or other intermediary which has been retained by or is authorized to act
on behalf of ResNet or any of its Affiliates who might be entitled to any fee or
commission from TCI-Satellite or any of its Affiliates in connection with the
execution, delivery and performance of this Agreement or the Transaction
Documents.
(h) The Option Stock, when paid for by and issued to TCI-Satellite in
accordance with the terms of this Agreement, will be duly and validly issued,
fully paid and nonassessable. Upon issuance of the Option Stock, ResNet will
deliver to TCI-Satellite good and valid title to the Option Stock, free and
clear of any Liens. The Option Stock is not subject to any preemptive rights or
other similar rights. Assuming that the representations and warranties of TCI-
Satellite contained in Sections 3(h), (i), (j), (k), and (l) are true and
correct, when issued to TCI-Satellite in accordance with the provisions hereof,
the Option Stock will have been issued in accordance with the registration or
qualification provisions of the 1933 Act and any relevant state securities laws
or pursuant to valid exemptions therefrom.
(i) The authorized capital stock of ResNet consists of 10,000,000
shares of common stock, par value $.01 per share, of which 1,000,000 shares are
issued and outstanding, and 5,000,000 shares of preferred stock of which no
shares are issued and outstanding. Immediately prior to issuance of the Initial
Stock to TCI-Satellite under the Subscription Agreement, all of the shares of
issued and outstanding capital stock of ResNet are owned beneficially and of
record by LodgeNet. There are no outstanding or authorized (i) securities of
ResNet convertible into or exchangeable or exercisable for any shares of its
capital stock, or (ii) subscriptions, options, warrants, calls, rights,
commitments, or other agreements or obligations of any kind obligating ResNet to
issue any additional shares of its capital stock or any other securities
convertible into or evidencing the right to acquire or subscribe for any shares
of its capital stock. ResNet does not directly or indirectly own (beneficially
or of record) any stock or other ownership in or control any other entity.
(j) ResNet is not an "investment company" or a company "controlled" by
an investment company within the meaning of the Investment Company Act, and
ResNet has not relied on rule 3a-2 under the Investment Company Act as a means
of excluding it from the definition of an "investment company" under the
Investment Company Act at any time within the three year period preceding the
date of issuance of the Initial Stock to TCI-Satellite under the Subscription
Agreement.
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<PAGE>
(k) There are no suits, claims, grievances, actions, proceedings, or
governmental investigations pending or, to the best knowledge of ResNet or
LodgeNet, threatened against or affecting ResNet which (i) seek to restrain or
enjoin the consummation of the transactions contemplated by this Agreement or
(ii) might have a Material Adverse Effect on ResNet or a material adverse effect
on the ability of ResNet to perform its obligations under this Agreement or
under the Transaction Documents. ResNet is not in violation of any term of any
judgment, decree, injunction, or order to which it is subject, which violation
could have a Material Adverse Effect on ResNet or a material adverse effect on
the ability of ResNet to perform its obligations under this Agreement or under
the Transaction Documents.
5. Further Assurances. From time to time after the date hereof and without
------------------
further consideration, the Parties will execute and deliver, or arrange for the
execution and delivery of such other instruments of conveyance and transfer or
other instruments or documents and take or arrange for such other actions as may
reasonably be requested to complete more effectively the transactions
contemplated by this Agreement or the Transaction Documents.
6. Conditions to the Obligations of TCI-Satellite.
----------------------------------------------
The obligation of TCI-Satellite to pay the Purchase Price for the
Option Stock is subject to the prior satisfaction of each of the following
conditions:
(a) Any applicable waiting period (and any extension thereof) under
the HSR Act will have expired or been terminated without the commencement or
threat of any litigation by a Governmental Authority of competent jurisdiction
to restrain the issuance of the Option Stock to TCI-Satellite.
(b) All consents required to be obtained by ResNet in connection with
the issuance of the Option Stock to TCI-Satellite shall have been obtained and
remain in full force and effect.
(c) No order, stay, judgment or decree shall have been issued by any
court and be in effect restraining or prohibiting the issuance of the Option
Stock to TCI-Satellite.
(d) ResNet shall simultaneously deliver to TCI-Satellite the
Certificate.
7. Conditions to the Obligations of ResNet.
---------------------------------------
The obligations of ResNet to be performed by ResNet in connection with
issuance of the Option Stock to TCI-Satellite upon an exercise of the Option are
subject to the satisfaction of each of the following conditions:
(a) Any applicable waiting period under the HSR Act (and any extension
thereof) shall have expired or been terminated without the commencement or
threat of any litigation by a
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<PAGE>
Governmental Authority of competent jurisdiction to restrain the issuance of the
Option Stock to TCI-Satellite.
(b) All consents required to be obtained by TCI-Satellite in connection with
the issuance of the Option Stock to TCI-Satellite shall have been obtained and
remain in full force and effect.
(c) No order, stay, judgment or decree will have been issued by any court
and be in effect restraining or prohibiting the issuance of the Option Stock to
TCI-Satellite.
(d) TCI-Satellite shall have paid the Purchase Price to ResNet in the manner
specified in Section 2(d).
(e) The Conversion Stock shall have been issued or shall be issued
simultaneously with issuance of the Option Stock.
8. Miscellaneous.
-------------
(a) The Certificate representing shares of Option Stock shall bear the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION THEREFROM
UNDER SAID ACT. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ALSO ARE
SUBJECT TO RESTRICTIONS ON TRANSFER CONTAINED IN A STOCKHOLDERS'
AGREEMENT DATED AS OF OCTOBER 21, 1996, A COPY OF WHICH IS ON FILE AND
AVAILABLE FOR INSPECTION DURING NORMAL BUSINESS HOURS AT THE PRINCIPAL
OFFICE OF THE CORPORATION, AND ANY ATTEMPTED TRANSFER IN VIOLATION OF
THE TERMS OF SUCH STOCKHOLDERS' AGREEMENT IS VOID.
(b) Except as expressly set forth herein, the fees and expenses (including
the fees of any lawyers, accountants, investment bankers or others engaged by
such party) in connection with this Agreement and the transactions contemplated
hereby whether or not the transactions contemplated hereby are consummated will
be paid by the Party incurring the same.
(c) All documentation, notices, reports and correspondence under this
Agreement shall be submitted and maintained in the English language. As used
herein, the singular shall include the plural and the plural may refer to only
the singular. The use of any gender shall be applicable to all genders. The
captions contained herein are for purpose of convenience only and are not part
of the Agreement. Unless otherwise specified, all references to Sections and
Exhibits in this Agreement are references to Sections of, and Exhibits to, this
Agreement.
-13-
<PAGE>
(d) If any portion or portions of this Agreement shall be deemed, for any
reason, invalid or unenforceable, the remaining portion or portions shall
nevertheless be valid, enforceable, and in effect, unless such remaining portion
or portions are not reasonably adequate to accomplish the basic purposes and
intent of the Parties. The Parties will negotiate in good faith to replace any
invalid or unenforceable provision of this Agreement with an enforceable
provision that accomplishes the original intent of the Parties to the extent
reasonably practicable.
(e) This Agreement cannot be amended except by a written instrument signed
by both Parties hereto.
(f) Either Party's failure to enforce any provision of this Agreement shall
not in any way be construed as a waiver of any such provision as to any future
violations thereof, or prevent that Party thereafter from enforcing each and
every other provision of this Agreement. No waiver of any right or remedy
hereunder shall be effective unless contained in a writing signed by the waiving
Party. The rights granted to the Parties herein are cumulative and the waiver by
a Party of any single remedy shall not constitute a waiver of such Party's right
to assert all other legal remedies available to it under the circumstances.
(g) Termination or expiration of this Agreement for any reason shall not
release either Party from any liabilities or obligations set forth in this
Agreement which the Parties have expressly agreed shall survive any termination
or expiration, or remain to be performed or by their nature would be intended to
be applicable following any such termination or expiration.
(h) This Agreement shall be governed and interpreted by the laws of the
State of Delaware, without regard to its conflict of law rules. The Parties
agree that all litigation relating to this Agreement shall be brought in the
state and federal courts of appropriate subject matter jurisdiction in Delaware
and each Party hereby submits itself to the non-exclusive in personam
jurisdiction of such courts for purposes of any such litigation. Neither Party
shall object to venue in such courts on the grounds of an inconvenient forum or
otherwise. In the event of any litigation between the Parties relating to this
Agreement, the prevailing Party shall be entitled to recover, in addition to any
other relief awarded by the court, its reasonable attorneys fees and all other
costs of preparing for and participating in the litigation, including all
appeals.
(i) Neither Party will be in default or otherwise liable for any delay in
or failure of its performance under this Agreement where such delay or failure
arises by reason of any act of God, acts of the common enemy, the elements,
earthquake, floods, fires, epidemics, quarantine restrictions, riots, strikes,
failure or delay in transportation, freight embargoes or other causes beyond its
control.
(j) This Agreement, together with any exhibits, schedules, appendices, and
other attachments, expresses the understanding of the Parties hereto and
supersedes all prior agreements, whether oral or written, relating to the
subject matters specifically expressed herein; provided, however, that the
Parties acknowledge that simultaneously with the execution of this Agreement
they are entering into the Loan Agreement, the Subscription Agreement, an
Equipment Sale Agreement,
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<PAGE>
a Signal Availability Agreement, a Stockholders' Agreement, and a Standstill
Agreement, which documents are related to this Agreement in that they
collectively document a transaction between the Parties of which this Agreement
is a part (collectively, the "Transaction Documents").
(k) Neither Party may assign any of its rights or delegate any of its
duties hereunder without the prior written consent of the other Party; provided
that either Party may assign this entire Agreement to an Affiliate of such Party
or to a Person that acquires all or substantially all of the assets or business
of such Party if such Party gives prior written notice to the other Party and
delivers an assumption agreement of such assignee in form and substance
reasonably satisfactory to the other Party pursuant to which such assignee
assumes the obligations of the assigning Party under this Agreement. Each Party
agrees that it will cause any acquiror of all or substantially all of the assets
or business of such Party to assume this Agreement. Subject to the foregoing,
this Agreement shall be binding upon and shall inure to the benefit of the
Parties, their respective successors and permitted assigns. For purposes of
this paragraph, "assign" shall mean to directly or indirectly sell, assign,
convey, lease, sublease or permit the use of, in any manner, any rights or
obligations under this Agreement.
(l) All notices, demands, requests, or other communications which may be or
are required to be given, served, or sent by one Party to the other Party
pursuant to this Agreement (except as otherwise specifically provided in this
Agreement) shall be in writing and shall be delivered personally, by overnight
messenger, or mailed by first-class certified mail, return receipt requested,
postage prepaid, addressed as follows:
If to ResNet: 808 West Avenue North
Sioux Falls, South Dakota 57104
Attn: Chief Operating Officer
Telephone: (605) 330-1330
With a copy similarly addressed to the attention of
Eric R. Jacobsen, Vice President and General Counsel
With a copy to: Pillsbury Madison & Sutro L.L.P.
235 Montgomery Street
San Francisco, California 94104
Attn: Gregg F. Vignos, Esq.
Telephone: (415) 983-1649
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<PAGE>
If to TCI-Satellite: 8085 South Chester Street
Suite 300
Englewood, Colorado 80112
Attn: Toby DeWeese
Telephone: (303) 712-4725
With a copy similarly addressed to the
attention of Corporate Counsel
Telephone: (303) 712-4618
With a copy to: Sherman & Howard L.L.C.
633 Seventeenth Street
Suite 3000
Denver, Colorado 80202
Attn: Peggy Knight, Esq.
Telephone: (303) 299-8140
Either Party may designate by notice in writing a new address or addressee
to which any notice, demand, request, or communication may thereafter be so
given, served or sent. Each notice, demand, request, or communication shall be
deemed sufficiently given, served, sent or received for all purposes at such
time as it is delivered to the addressee named above as to each Party, with the
signed messenger receipt, return receipt, or the delivery receipt being deemed
conclusive evidence of such delivery, or at such time as delivery is refused by
the addressee upon presentation.
(m) This Agreement may be executed in any number of counterparts each of
which shall be an original with the same effect as if the signatures thereof and
hereto were upon the same instrument.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
RESNET COMMUNICATIONS, INC. TCI SATELLITE ENTERTAINMENT,
INC.
By: By:
----------------------------- ----------------------------------
Name: Name:
--------------------------- --------------------------------
Title: Title:
-------------------------- -------------------------------
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<PAGE>
EXHIBIT 10.15
STANDSTILL AGREEMENT
BY AND BETWEEN
LODGENET ENTERTAINMENT CORPORATION
AND
TCI SATELLITE ENTERTAINMENT, INC.
Dated as of October 21, 1996
<PAGE>
EXECUTION COPY
STANDSTILL AGREEMENT
--------------------
This STANDSTILL AGREEMENT (the "Agreement"), is entered into as of
October 21, 1996, by and between LodgeNet Entertainment Corporation, a Delaware
corporation ("LodgeNet"), and TCI Satellite Entertainment, Inc., a Delaware
corporation ("TCI-Satellite") (collectively, LodgeNet and TCI-Satellite are
referred to as the "Parties" and individually as a "Party").
RECITALS
--------
A. LodgeNet or ResNet Communications, Inc., a Delaware corporation
("ResNet"), and TCI-Satellite, simultaneously with the execution of this
Agreement, are entering into a Subscription Agreement, an Equipment Sale
Agreement, a Signal Availability Agreement, a Subordinated Convertible Term Loan
Agreement, an Option Agreement and a Stockholders' Agreement (collectively, the
"Transaction Documents"), providing for a series of transactions, including the
purchase by TCI-Satellite of 4.99% of the common stock of ResNet; and
B. The remaining stock of ResNet is owned by LodgeNet, which is
publicly traded, and LodgeNet and ResNet have requested that TCI-Satellite and
its Controlled Affiliates agree to, and TCI-Satellite has agreed to and to cause
its Controlled Affiliates to agree to, restrictions on acquiring shares of the
capital stock of LodgeNet and shares of the capital stock of ResNet that may in
the future be publicly traded.
AGREEMENT
---------
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Parties agree as follows:
ARTICLE I
----------
Definitions
-----------
(a) As used in this Agreement, the following terms shall have the
following meanings (unless indicated otherwise, all Article and Section
references are to Articles and Sections of this Agreement):
"Affiliate": With respect to any Person, any other Person Controlling,
Controlled by or under common Control with such Person.
"Beneficial ownership": As defined in Rule 13d-3 under the Exchange
Act, as such rule is currently in effect.
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<PAGE>
"Control": The ownership, directly or indirectly, of Voting Power
representing the right generally to elect a majority of the directors (or
similar officials) of any Person, or the possession, by contract or otherwise,
of the authority to direct the management and policies of such Person.
"Controlled Affiliate": With respect to any Person, any Wholly Owned
Subsidiary of such Person and any other Person under the Control of such Person.
"Exchange Act": The Securities Exchange Act of 1934, as amended, or
any successor federal statute, and the rules and regulations thereunder, all as
the same may be in effect from time to time.
"Group": As defined in Section 13(d)(3) of the Exchange Act.
"Person": Any individual, partnership, limited liability company,
corporation, trust, unincorporated organization or other entity, or a government
or agency or political subdivision thereof.
"SEC": The United States Securities and Exchange Commission or its
successor.
"Subsidiary": With respect to LodgeNet or TCI-Satellite, any Person
with respect to which the Voting Power to elect a majority of the board of
directors (or similar governing body) is held by LodgeNet or TCI-Satellite, as
may be the case.
"Voting Power": The right to vote generally in the election of
directors, or other similar officials, through the beneficial ownership of
common stock or other securities or ownership interests entitled to vote
generally in the election of directors or such officials. For purposes of
calculating the percentage ownership of Voting Power of any Person, all
warrants, options or rights held by any Person shall be deemed to have been
exercised and all convertible or exchangeable securities shall be deemed to have
been converted or exchanged, as the case may be (disregarding for such purposes
any restrictions on conversion, exchange or exercise), in each case for the
maximum number of shares of common stock or other securities entitled to vote
generally in the election of directors or similar officials; provided that, any
rights to acquire Voting Securities held by TCI-Satellite under any Transaction
Document shall not be taken into account for purposes of determining the Voting
Power held by TCI-Satellite with respect to such Voting Securities.
"Voting Securities": Any securities, including instruments
convertible into Voting Securities, of LodgeNet and ResNet (unless the context
specifically contemplates ResNet or LodgeNet) having the ordinary power to vote,
in the absence of contingencies, in the election of directors of LodgeNet or
ResNet, as the case may be.
"Wholly Owned Subsidiary": With respect to any Person, any entity as
to which 100% of the Voting Securities or other ownership interests having power
to elect the board of directors or other officials performing similar functions
are owned directly or indirectly by any Person.
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<PAGE>
(b) Each of the following terms is defined in the Section set forth
opposite such term:
Term Section
---- -------
Percentage Limitation Article III(i)
Standstill Period Article II
Transaction Documents Recital A
ARTICLE II
-----------
Term
----
The term of this Agreement (the "Standstill Period") shall commence on
the date hereof and terminate on July 21, 2005.
ARTICLE III
------------
Standstill Provisions
---------------------
TCI-Satellite agrees, and agrees to cause its Controlled Affiliates to
agree, with LodgeNet that, except as may be specifically permitted by this
Agreement or the Transaction Documents or unless it is specifically authorized
in writing to do so by LodgeNet, during the Standstill Period TCI-Satellite and
its Controlled Affiliates will not, directly or indirectly:
(i) in any way acquire or agree to acquire (other than
pursuant to any of the Transaction Documents) beneficial ownership of
any Voting Securities or any direct or indirect rights or options to
acquire beneficial ownership of any Voting Securities (A) of ResNet or
(B) of LodgeNet if the aggregate percentage (calculated by Voting
Power) of the Voting Securities beneficially owned by TCI-Satellite
and its Controlled Affiliates after giving effect to such acquisition
would exceed 10% of the Voting Power of LodgeNet (the "Percentage
Limitation");
(ii) make any public announcement with respect to, or submit to
ResNet or LodgeNet or any of their respective directors, officers,
representatives, employees, attorneys, advisers, agents or Affiliates
(whether publicly or otherwise) any proposal for, the acquisition of
Voting Securities not permitted by paragraph (i) above;
(iii) propose to (a) enter into, directly or indirectly, any
merger, consolidation or business combination involving ResNet or
LodgeNet or any merger or business combination involving any of
ResNet's or LodgeNet's Subsidiaries the consummation of which would
result in TCI-Satellite or its Controlled Affiliates exceeding the
Percentage Limitation, or (b) purchase, directly or indirectly,
substantially all of the assets of ResNet or LodgeNet or any of their
respective Subsidiaries outside the ordinary course of business;
-3-
<PAGE>
(iv) make, or in any way participate in, any "solicitation" of
"proxies" to vote any Voting Securities (as such terms are defined or
used in Regulation 14A under the Exchange Act, as such Regulation is
currently in effect) of ResNet, if ResNet is at the time publicly
traded and subject to the proxy rules, or LodgeNet;
(v) form, join or in any way participate in a Group with
respect to any Voting Securities of LodgeNet or ResNet if ResNet is at
the time publicly traded;
(vi) deposit any Voting Securities of LodgeNet in a voting
trust or subject any Voting Securities of LodgeNet to any proxy or
other arrangement or agreement with respect to the voting of such
Voting Securities or other agreement having similar effect other than
a proxy, trust or other arrangement or agreement the beneficial
ownership of which is held by TCI-Satellite and/or its Controlled
Affiliates and is not effected for a purpose inconsistent with this
Agreement;
(vii) disclose publicly any intention, plan or arrangement
inconsistent with the foregoing; or
(viii) otherwise act, alone or in concert with others, to seek
to control or influence the management, Board of Directors or policies
of LodgeNet.
ARTICLE IV
-----------
Voting of Voting Securities
---------------------------
TCI-Satellite agrees that it shall appear, and shall cause its
Controlled Affiliates to appear, as appropriate, in person or by proxy, at all
shareholder meetings of ResNet and LodgeNet, as the case may be, at which
matters are submitted to shareholders for a vote; provided that such appearance
will occur only if TCI-Satellite (or its Controlled Affiliates) hold Voting
Securities eligible to vote at any such meeting, and TCI-Satellite (and its
Controlled Affiliates) shall be free to vote such Voting Securities at such
meeting in their discretion with respect to any such matters.
ARTICLE V
---------
Miscellaneous
-------------
5.1 Except as expressly set forth herein, the fees and expenses
(including the fees of any lawyers, accountants, investment bankers or others
engaged by a Party) in connection with this Agreement and the transactions
contemplated hereby, whether or not the transactions contemplated hereby are
consummated, will be paid by the Party incurring the same.
5.2 All documentation, notices, reports and correspondence under this
Agreement shall be submitted and maintained in the English language. As used
herein, the singular shall include the
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plural and the plural may refer to only the singular. The use of any gender
shall be applicable to all genders. The captions contained herein are for
purpose of convenience only and are not part of the Agreement.
5.3 All notices, demands, requests, or other communications which may
be or are required to be given, served, or sent by one Party to the other Party
pursuant to this Agreement (except as otherwise specifically provided in this
Agreement) shall be in writing and shall be delivered personally, by overnight
messenger or mailed by first-class certified mail, return receipt requested,
postage prepaid, addressed as follows:
If to LodgeNet: 808 West Avenue North
Sioux Falls, South Dakota 57104
Attn: Chief Operating Officer
Telephone: (605) 330-1330
With a copy similarly addressed to the attention
of Eric R. Jacobsen, Vice President and General
Counsel
With a copy to: Pillsbury Madison & Sutro L.L.P.
235 Montgomery Street
San Francisco, California 94104
Attn: Gregg F. Vignos, Esq.
Telephone: (415) 983-1649
If to TCI-Satellite: 8085 South Chester Street
Suite 300
Englewood, Colorado 80112
Attn: Toby DeWeese
Telephone: (303) 712-4725
With a copy similarly addressed to the
attention of Corporate Counsel
Telephone: (303) 712-4618
With a copy to: Sherman & Howard L.L.C.
633 Seventeenth Street
Suite 3000
Denver, Colorado 80202
Attn: Peggy Knight, Esq.
Telephone: (303) 299-8140
Either Party may designate by notice in writing a new address or
addressee to which any notice, demand, request, or communication may thereafter
be so given, served or sent. Each notice,
-5-
<PAGE>
demand, request, or communication shall be deemed sufficiently given, served,
sent or received for all purposes at such time as it is delivered to the
addressee named above as to each Party, with the signed messenger receipt,
return receipt, or the delivery receipt being deemed conclusive evidence of such
delivery, or at such time as delivery is refused by the addressee upon
presentation.
5.4 If any portion or portions of this Agreement shall be deemed, for
any reason, invalid or unenforceable, the remaining portion or portions shall
nevertheless be valid, enforceable, and in effect, unless such remaining portion
or portions are not reasonably adequate to accomplish the basic purposes and
intent of the Parties. The Parties will negotiate in good faith to replace any
invalid or unenforceable provision of this Agreement with an enforceable
provision that accomplishes the original intent of the Parties to the extent
reasonably practicable.
5.5 This Agreement cannot be amended except by a written instrument
signed by the Parties hereto.
5.6 Either Party's failure to enforce any provision of this Agreement
shall not in any way be construed as a waiver of any such provision as to any
future violations thereof or prevent that Party thereafter from enforcing each
and every other provision of this Agreement. No waiver of any right or remedy
hereunder shall be effective unless contained in a writing signed by the waiving
Party. The rights granted to the Parties herein are cumulative and the waiver by
a Party of any single remedy shall not constitute a waiver of such Party's right
to assert all other legal remedies available to it under the circumstances.
5.7 This Agreement shall be governed and interpreted by the laws of
the State of Delaware, without regard to its conflict of law rules. The Parties
agree that all litigation relating to this Agreement shall be brought in the
state and federal courts of appropriate subject matter jurisdiction in Delaware,
and each Party hereby submits itself to the non-exclusive in personam
jurisdiction of such courts for purposes of any such litigation. Neither Party
shall object to venue in such courts on the grounds of an inconvenient forum or
otherwise. In the event of any litigation between the Parties relating to this
Agreement, the prevailing Party shall be entitled to recover, in addition to any
other relief awarded by the court, its reasonable attorneys fees and all other
costs of preparing for and participating in the litigation, including all
appeals.
5.8 Neither Party will be in default or otherwise liable for any
delay in or failure of its performance under this Agreement where such delay or
failure arises by reason of any act of God, acts of the common enemy, the
elements, earthquake, floods, fires, epidemics, quarantine restrictions, riots,
strikes, failure or delay in transportation, freight embargoes or other causes
beyond its control.
5.9 This Agreement expresses the understanding of the Parties hereto
and supersedes all prior agreements, whether oral or written, relating to the
subject matters specifically expressed herein; provided, however, that the
Parties acknowledge that simultaneously with the execution of this Agreement
they or their Affiliates are entering into the Transaction Documents which are
related to
-6-
<PAGE>
this Agreement in that they collectively document a transaction between the
Parties of which this Agreement is a part.
5.10 Neither Party may assign any of its rights or delegate any of
its duties hereunder without the prior written consent of the other Party;
provided that either Party may assign this entire Agreement to an Affiliate of
such Party or to a Person that acquires all or substantially all of the assets
or business of such Party if such Party gives prior written notice to the other
Party and delivers an assumption agreement of such assignee in form and
substance reasonably satisfactory to the other Party pursuant to which such
assignee assumes the obligations of the assigning Party under this Agreement.
Each Party agrees that it will cause any acquiror of all or substantially all of
the assets or business of such Party to assume this Agreement. Subject to the
foregoing, this Agreement shall be binding upon and shall inure to the benefit
of the Parties, their respective successors and permitted assigns. For purposes
of this paragraph, "assign" shall mean to directly or indirectly sell, assign,
convey, lease, sublease or permit the use of, in any manner, any rights or
obligations under this Agreement.
5.11 This Agreement may be executed in any number of counterparts
each of which shall be an original with the same effect as if the signatures
thereof and hereto were upon the same instrument.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
LODGENET ENTERTAINMENT TCI SATELLITE ENTERTAINMENT,
CORPORATION INC.
By: By:
--------------------------- ----------------------------
Name: Name:
------------------------- --------------------------
Title: Title:
------------------------ -------------------------
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<PAGE>
EXHIBIT 10.16
STOCKHOLDERS' AGREEMENT
BETWEEN
LODGENET ENTERTAINMENT CORPORATION
AND
TCI SATELLITE ENTERTAINMENT, INC.
Dated as of October 21, 1996
<PAGE>
EXECUTION COPY
STOCKHOLDERS' AGREEMENT
-----------------------
This STOCKHOLDERS' AGREEMENT (this "Agreement") is entered into as of
October 21, 1996, by and between ResNet Communications, Inc., a Delaware
corporation ("ResNet"), LodgeNet Entertainment Corporation, a Delaware
corporation ("LodgeNet"), and TCI Satellite Entertainment, Inc., a Delaware
corporation ("TCI-Satellite") (each of TCI-Satellite and LodgeNet being referred
to herein individually as a "Stockholder" and together as the "Stockholders").
RECITALS
--------
A. Prior to the date hereof, LodgeNet owns all of the issued and
outstanding common stock of ResNet.
B. Simultaneously with the execution of this Agreement, TCI-Satellite
is entering into a Subscription Agreement (the "Subscription Agreement") to
subscribe for and acquire 52,520 shares of the common stock of ResNet, which
shares represent, immediately after such issuance, 4.99% of the issued and
outstanding common stock of ResNet (the "Initial Stock").
C. Simultaneously with the execution of this Agreement, TCI-Satellite
and ResNet are entering into a Subordinated Convertible Term Loan Agreement (the
"Loan Agreement") pursuant to which TCI-Satellite has agreed to lend to ResNet
the principal amount of $34,603,947, the loans under which are convertible under
certain circumstances into shares of the common stock of ResNet (the "Conversion
Stock"), that when combined with the Initial Stock will give TCI-Satellite the
right to acquire shares of common stock of ResNet representing immediately after
issuance of all such shares, a total of 36.99% of the issued and outstanding
common stock of ResNet on a fully diluted basis. Under the terms of the Loan
Agreement, if TCI-Satellite is unable to convert the loans in full into the
Conversion Stock due to the Regulatory Restrictions, on the maturity date under
the Loan Agreement ResNet has agreed to issue to TCI-Satellite a warrant to
acquire the unconverted portion of the Conversion Stock (the "Conversion
Warrant").
D. Simultaneously with the execution of this Agreement, TCI-Satellite
and ResNet are entering into an Option Agreement (the "Option Agreement")
pursuant to which ResNet is granting to TCI-Satellite an option (the "Option")
to acquire additional shares of common stock of ResNet (the "Option Stock") that
when combined with the Initial Stock and the Conversion Stock will give TCI-
Satellite the right to acquire shares of common stock of ResNet representing,
immediately after issuance of all such shares, a total of 50% of the issued and
outstanding common stock of ResNet on a fully diluted basis. If TCI-Satellite
has not exercised its option in full to acquire the Option Stock upon issuance
by ResNet to TCI-Satellite of the Conversion Warrant, then ResNet will issue to
TCI-Satellite, simultaneously with issuance of the Conversion Warrant, a warrant
to acquire the unexercised portion of the Option Stock (the "Option Warrant").
<PAGE>
E. ResNet and the Stockholders desire to restrict the transfer of
shares of common stock of ResNet, to provide anti-dilution protection for the
Stockholders' respective ownership positions in ResNet, and to provide for
certain other matters.
AGREEMENT
---------
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, ResNet and the Stockholders hereby agree as
follows:
1. Definitions.
-----------
For purposes of this Agreement, the following terms shall have the
following meanings:
"Affiliate" of any Person at any time shall mean any other Person
---------
directly or indirectly controlling, controlled by or under common control with
such Person at such time; with "control" for such purposes meaning the ownership
of securities representing at least 75% of the economic interests in and 75% of
the voting power of a Person.
"Agreement" shall mean this Stockholders' Agreement, including any
---------
exhibits and attachments hereto, as amended from time to time.
"Appraised Purchase Price" shall have the meaning specified in Section
------------------------
3(a)(iii).
"Below Appraised Value Offer" shall have the meaning specified in
---------------------------
Section 3(b).
"Buying Stockholder" shall have the meaning specified in Section 3(a).
------------------
"Conversion Stock" shall have the meaning specified in Recital C.
----------------
"Conversion Warrant" shall have the meaning specified in Recital C.
------------------
"Definitive Purchase Notice" shall have the meaning specified in
--------------------------
Section 3(a)(iv).
"Definitive Purchase Notice Date" shall have the meaning specified in
-------------------------------
Section 3(a)(iv).
"Definitive Sale Notice" shall have the meaning specified in Section
----------------------
3(a)(iv).
"Definitive Sale Notice Date" shall have the meaning specified in
---------------------------
Section 3(a)(iv).
"Final ResNet Fair Market Value" shall have the meaning specified in
------------------------------
Section 3(a)(ii).
"Governmental Authority" shall mean any federal, state, municipal or local
-----------------------
governmental authority or political subdivision thereof.
-2-
<PAGE>
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
-------
of 1976, as amended, and the rules and regulations thereunder, as in effect from
time to time.
"Initial Stock" shall have the meaning specified in Recital B.
-------------
"Legal Requirement" shall mean the requirements of any law, ordinance,
-----------------
statute, rule, regulation, code, order, judgment, decree, injunction, franchise,
determination, approval, permit, license, authorization or other requirement of
any Governmental Authority.
"Loan Agreement" shall have the meaning specified in Recital C.
--------------
"LodgeNet" shall have the meaning specified in the Preamble.
--------
"Negotiated Purchase Price" shall have the meaning specified in
-------------------------
Section 3(a)(i).
"Negotiation Period" shall have the meaning specified in Section
------------------
3(a)(i).
"Notice Date" shall have the meaning specified in Section 3(a).
-----------
"Option" shall have the meaning specified in Recital D.
------
"Option Agreement" shall have the meaning specified in Recital D.
----------------
"Option Stock" shall have the meaning specified in Recital D.
------------
"Option Warrant" shall have the meaning specified in Recital D.
--------------
"Person" shall mean and include an individual, a corporation, a
------
partnership (general, limited or limited liability), a joint venture, a limited
liability company, an association, a trust or any other organization or entity,
including a Governmental Authority.
"Preliminary ResNet Fair Market Value" shall have the meaning
------------------------------------
specified in Section 3(a)(ii).
"Prohibited Transferees" shall mean Comsat Corporation, Ascent
----------------------
Entertainment Group, Inc., On Command Corporation, MagiNet Corporation, IPC of
Singapore, and their respective successors, assigns, or affiliates.
"Proprietary Information" shall have the meaning specified in Section
-----------------------
12.
"Reconciliation Stock" shall mean 152,750 shares of common stock of
--------------------
ResNet to be issued to TCI-Satellite under the Loan Agreement or the Conversion
Warrant upon issuance of the Option Stock to TCI-Satellite, as such number of
shares may be adjusted pursuant to the Loan Agreement or the Conversion Warrant.
-3-
<PAGE>
"Regulatory Restrictions" shall mean any restriction or limitation on
-----------------------
the ability of TCI-Satellite to acquire all or any portion of the Conversion
Stock, Reconciliation Stock, or Option Stock because such acquisition would
cause ResNet or TCI-Satellite to violate any Legal Requirement, including,
without limitation, 47 U.S.C. (S) 533(a)(2) or any regulations of the FCC
promulgated thereunder if any SMATV service offered by ResNet continued to be
offered after such acquisition separate and apart from any applicable franchised
cable service.
"ResNet" shall have the meaning specified in the Preamble.
------
"Right of First Negotiation" shall have the meaning specified in
--------------------------
Section 3(a).
"Right of First Negotiation Closing Date" shall have the meaning
---------------------------------------
specified in Section 3(a)(vii).
"Right of First Refusal" shall have the meaning specified in Section
----------------------
3(b).
"Right of First Refusal Closing Date" shall have the meaning specified
-----------------------------------
in Section 3(b)(ii).
"Right of First Refusal Period" shall have the meaning specified in
-----------------------------
Section 3(b)(i).
"Right of First Refusal Purchase Price" shall have the meaning
-------------------------------------
specified in Section 3(b).
"Selling Stockholder" shall have the meaning specified in Section
-------------------
3(a).
"SMATV" shall mean satellite master antenna television.
-----
"Stock" shall mean any and all shares of the common stock of ResNet.
-----
"Stockholder" and "Stockholders" shall have the meaning specified in
----------- ------------
the Preamble.
"Subscription Agreement" shall have the meaning specified in
----------------------
Recital B.
"TCI-Satellite" shall have the meaning specified in the Preamble.
-------------
"Transaction Documents" shall have the meaning specified in Section
---------------------
15(j).
2. Restrictions on Transfer of Stock.
---------------------------------
(a) Neither Stockholder shall sell, assign, encumber, pledge,
distribute, or otherwise transfer any shares of Stock or any interest in any
shares of Stock, in whole or in part, unless (i) such transfer is made to an
Affiliate of such Stockholder, (ii) the Stockholder first obtains the written
consent of the other Stockholder to such transfer, or (iii) the Stockholder
first follows the right of first negotiation and right of first refusal
procedures set forth in Section 3; provided, however, that in no event may TCI-
Satellite assign any interest in any shares of Stock to any of the Prohibited
-4-
<PAGE>
Transferees without the prior written consent of LodgeNet, which consent may be
withheld in its sole and absolute discretion.
(b) Notwithstanding any transfer of Stock in accordance with the terms
of this Agreement, including any successive transfers of such Stock, such Stock
shall nevertheless remain subject to the terms of this Agreement, and the
transferee (including any successive transferees) shall become a signatory to
this Agreement acknowledging acceptance of this Agreement and agreeing to abide
by its terms and conditions. Any attempted transfer of Stock in violation of
this Agreement shall be null and void.
3. Right of First Negotiation; Right of First Refusal.
--------------------------------------------------
(a) Except with respect to transfers permitted under Section 2(a)(i)
or (ii), if, during the term of this Agreement, a Stockholder desires to sell,
assign or otherwise transfer all of such Stockholder's Stock (which shall
include for all purposes of this Agreement, in the case of TCI-Satellite, the
right to acquire any Conversion Stock, any Reconciliation Stock, and any Option
Stock and any right, title, and interest in the Conversion Warrant or the Option
Warrant if such warrants, or either of them, are issued unless the rights of
TCI-Satellite to acquire any Option Stock under the Option Agreement or Option
Warrant have expired by their terms in which event the right to acquire any
Reconciliation Stock and any Option Stock and any right, title, and interest in
the Option Warrant shall not be included), such Stockholder (the "Selling
Stockholder") first shall deliver a notice to the other Stockholder (the "Buying
Stockholder") offering to sell all of the Selling Stockholder's Stock to the
Buying Stockholder (the date of such notice being the "Notice Date") in
accordance with the following procedures of this Section 3(a) (the "Right of
First Negotiation").
(i) The Selling Stockholder and the Buying Stockholder will
negotiate in good faith for a period of 30 days after the Notice Date (the
"Negotiation Period") regarding the purchase price to be paid for the Selling
Stockholder's Stock (the "Negotiated Purchase Price"). If the Selling
Stockholder and the Buying Stockholder agree on the Negotiated Purchase Price,
the closing with respect to the purchase and sale of the Selling Stockholder's
Stock shall occur in accordance with the provisions of Section 3(a)(vii).
(ii) If the Selling Stockholder and the Buying Stockholder are
unable to agree on the Negotiated Purchase Price during the Negotiation Period,
within ten days after the end of the Negotiation Period the Selling Stockholder
and the Buying Stockholder each shall select a nationally recognized investment
banker who shall determine, within 45 days after the end of the Negotiation
Period, the net fair market value of ResNet on a going concern basis, as of the
Notice Date, taking into account all indebtedness of ResNet (including any
guarantees of indebtedness for borrowed money) and the current assets and
current liabilities of ResNet, based upon a transaction negotiated on an arms'-
length basis between a willing buyer and willing seller, with neither having any
compulsion to buy or sell and with each party having full knowledge of all of
the facts and circumstances of ResNet's business and properties (the
"Preliminary ResNet Fair Market Value"). If the Preliminary ResNet Fair Market
Value determinations of the two investment bankers vary by
-5-
<PAGE>
more than 10%, within ten days after such determinations of the Preliminary
ResNet Fair Market Value, such investment bankers shall select a third
nationally recognized investment banker who shall make an independent
determination of the Preliminary ResNet Fair Market Value within 30 days after
being selected. The final determination of the net fair market value of ResNet
(the "Final ResNet Fair Market Value") will be the average of the Preliminary
ResNet Fair Market Value determination of such third investment banker and the
Preliminary ResNet Fair Market Value determination of the one of the first two
investment bankers that is closest to the Preliminary ResNet Fair Market Value
determination of such third investment banker.
(iii) The purchase price for the Selling Stockholder's Stock (the
"Appraised Purchase Price") shall be determined by the two investment bankers
whose valuations determined the Final ResNet Fair Market Value by multiplying
(A) the sum of (1) the Final ResNet Fair Market Value, and (2) the Option Stock
Purchase Price (as defined below), by (B) a fraction the numerator of which is
the number of shares of Stock held by the Selling Stockholder and the
denominator of which is the total number of shares of issued and outstanding
common stock of ResNet (including the number of shares of Option Stock to be
issued to TCI-Satellite pursuant to exercise of the Option and assuming prior
issuance of the maximum number of shares of Conversion Stock and Reconciliation
Stock), and adjusting the resulting product as such investment bankers determine
to be appropriate to reflect any control premium or discount for lack of
marketability associated with the Selling Stockholder's Stock; provided,
however, that if such investment bankers do not agree on the appropriate amount
of any control premium or discount for lack of marketability associated with the
Selling Stockholder's Stock, then any such premium or discount shall be
determined by averaging the determinations of such investment bankers, and
provided further that if TCI-Satellite is the Selling Stockholder and the
Selling Stockholder's Stock includes any Option Stock with respect to which TCI-
Satellite has not yet exercised the Option and paid the purchase price for such
Option Stock, then the Appraised Purchase Price for TCI-Satellite's Stock shall
be reduced by the portion of the Appraised Purchase Price attributable to such
Option Stock (the "Option Stock Purchase Price") determined by multiplying (C)
the sum of (1) the Final ResNet Fair Market Value and (2) the Option Stock
Purchase Price by (D) a fraction the numerator of which is the number of shares
of Option Stock with respect to which TCI-Satellite has not exercised the Option
and paid the purchase price and the denominator of which is the total number of
shares of issued and outstanding common stock of ResNet (including all Option
Stock and assuming prior issuance of the maximum number of shares of Conversion
Stock and Reconciliation Stock). Notwithstanding the preceding provisions of
this Section 3(a)(iii), (E) if LodgeNet is the Selling Stockholder and if TCI-
Satellite is not prevented by the Regulatory Restrictions from exercising the
Option to acquire the Option Stock but TCI-Satellite has not exercised the
Option and paid the purchase price for the Option Stock as of the date on which
the Appraised Purchase Price is determined, or (F) whether LodgeNet or TCI-
Satellite is the Selling Stockholder, if the rights of TCI-Satellite to acquire
any Option Stock under the Option Agreement or Option Warrant have expired by
their terms without issuance of the Option Stock to TCI-Satellite, then in the
case of either (E) or (F) the Reconciliation Stock, the Option Stock, and the
Option Stock Purchase Price shall be excluded from the calculation contained in
the preceding provisions of this Section 3(a)(iii) for all purposes.
-6-
<PAGE>
(iv) Within 15 business days after the determination of the
Appraised Purchase Price for the Selling Stockholders' Stock, the Selling
Stockholder will notify the Buying Stockholder if the Selling Stockholder
desires to sell all of its Stock for the Appraised Purchase Price (the
"Definitive Sale Notice," the date of which being the "Definitive Sale Notice
Date"), and if the Selling Stockholder delivers a Definitive Sale Notice to the
Buying Stockholder, then the Buying Stockholder will notify the Selling
Stockholder if the Buying Stockholder desires to purchase all of the Selling
Stockholders' Stock for the Appraised Purchase Price within 15 business days
after the Definitive Sale Notice Date (the "Definitive Purchase Notice," the
date of which being the "Definitive Purchase Notice Date").
(v) If the Selling Stockholder delivers a Definitive Sale Notice
to the Buying Stockholder but the Buying Stockholder does not deliver a
Definitive Purchase Notice to the Selling Stockholder within the time periods
set forth in Section 3(a)(iv), then the Selling Stockholder will be free for a
period of one year after the Definitive Sale Notice Date to sell the Selling
Stockholder's Stock for a purchase price equal to or greater than the Appraised
Purchase Price, and the Buying Stockholder shall have no Right of First Refusal
with respect to any such sale of the Selling Stockholder's Stock.
(vi) If the Selling Stockholder delivers a Definitive Sale Notice
to the Buying Stockholder and the Buying Stockholder delivers a Definitive
Purchase Notice to the Selling Stockholder within the time periods set forth in
Section 3(a)(iv), then the closing with respect to the purchase and sale of the
Selling Stockholder's Stock shall occur in accordance with the provisions of
Section 3(a)(vii). If the Buying Stockholder delivers a Definitive Purchase
Notice but fails to purchase such Stock in accordance with the provisions of
Section 3(a)(vii), the Selling Stockholder will then be free for a period of two
years after the Definitive Sale Notice Date to sell such Stock for a purchase
price equal to or greater than the Appraised Purchase Price, and the Buying
Stockholder shall have no Right of First Refusal with respect to any such sale
of the Selling Stockholder's Stock.
(vii) The closing for any purchase and sale of Stock pursuant to
the Right of First Negotiation shall be held on the date selected by the Buying
Stockholder no later than 120 days after the determination of the Negotiated
Purchase Price or the Definitive Purchase Notice Date, as applicable, or on a
later date as mutually agreed by the Buying Stockholder and the Selling
Stockholder (the "Right of First Negotiation Closing Date"). Notwithstanding any
other provision of this Section 3(a)(vii), the Right of First Negotiation
Closing Date shall not occur before all necessary approvals of any Governmental
Authority have been obtained, including without limitation compliance with the
HSR Act, if applicable. If any such approvals cannot be obtained within the
otherwise applicable time period for closing, the closing shall occur as soon as
practicable after all such approvals are obtained. Failure by either party to
close within the applicable period stated herein (unless such failure is caused
by the inability of such person, after diligent effort, to obtain any necessary
approvals from any Governmental Authority) shall constitute a default entitling
the non-defaulting party to such remedies as are contained in this Agreement or
as may be provided under applicable law. On the Right of First Negotiation
Closing Date, the Buying Stockholder shall pay the Negotiated Purchase Price or
the Appraised Purchase Price, as applicable, as follows: (A) 10% in
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<PAGE>
cash by wire transfer of immediately available funds to an account designated by
the Selling Stockholder, and (B) 90% by delivery of the Buying Stockholder's
promissory note bearing interest at the prime rate charged by The Bank of New
York from time to time, compounded quarterly, with all principal and accrued
interest being due and payable on the date that is 18 months after the Right of
First Negotiation Closing Date, which note shall be prepayable without penalty
and shall be secured by a first priority security interest in the Selling
Stockholder's Stock.
(viii) If a determination of the Appraised Purchase Price is made
under Section 3(a)(iii), then the Selling Stockholder shall pay the fees and
expenses of the investment banker selected by it, the Buying Stockholder shall
pay the fees and expenses of the investment banker selected by it, and the
Selling Stockholder and the Buying Stockholder each shall pay one-half of the
fees and expenses of any third investment banker selected by the first two
investment bankers; provided, however, that if the Selling Stockholder elects
not to sell its Stock after the determination of the Appraised Purchase Price,
the Selling Stockholder shall pay all fees and expenses of both or all three of
the investment bankers, as applicable, and the Selling Stockholder shall have no
other obligation or liability with respect to its decision not to sell its
Stock.
(b) If the Buying Stockholder fails to deliver a Definitive Purchase
Notice under Section 3(a)(iv) and the Selling Stockholder desires to sell its
Stock to a third party pursuant to a bona fide written offer by such third party
to purchase such Stock for a purchase price that is less than the Appraised
Purchase Price (the "Below Appraised Value Offer"), then the Stock of the
Selling Stockholder shall be offered or deemed offered for sale to the Buying
Stockholder at the price (the "Right of First Refusal Purchase Price") and on
the terms stated in such bona fide written offer in accordance with the
following procedures of this Section 3(b) (the "Right of First Refusal").
(i) If the Selling Stockholder receives a Below Appraised Value
Offer that the Selling Stockholder desires to accept, the Selling Stockholder
shall deliver a copy of such written offer to the Buying Stockholder. The Buying
Stockholder shall have 10 business days from the date of receipt of such copy
(the "Right of First Refusal Period") in which to exercise its Right of First
Refusal to acquire the Selling Stockholder's Stock by giving written notice of
such exercise to the Selling Stockholder. If the Buying Stockholder fails to
give the Selling Stockholder written notice of exercise within the Right of
First Refusal Period, the Selling Stockholder will be free to sell the Stock
covered by the Below Appraised Value Offer for a period of one year after the
end of the Right of First Refusal Period, but only at a price equal to or
greater than and on terms not materially more favorable to the buyer than those
contained in the Below Appraised Value Offer. If the Below Appraised Value Offer
contains terms or provides for consideration which by reason of the unique
nature of such terms or consideration cannot be met by the Buying Stockholder,
then the Stock may be transferred pursuant to such offer only upon the written
consent of the Buying Stockholder. If the Buying Stockholder timely exercises
its Right of First Refusal to purchase the Stock of the Selling Stockholder, the
Buying Stockholder must purchase such Stock in accordance with the provisions of
Section 3(b)(ii). If the Buying Stockholder exercises the Right of First Refusal
but fails to purchase such Stock in accordance with the provisions of Section
3(b)(ii), the Selling Stockholder
-8-
<PAGE>
may then sell such Stock on terms substantially similar to the Below Appraised
Value Offer for a period of two years after the end of the Right of First
Refusal Period.
(ii) The closing for any purchase and sale of Stock pursuant to
an exercise of the Right of First Refusal shall be held on the date selected by
the Buying Stockholder no later than 30 days after the end of the Right of First
Refusal Period, or on a later date as mutually agreed by the Buying Stockholder
and the Selling Stockholder (the "Right of First Refusal Closing Date").
Notwithstanding any other provision of this Section 3(b)(ii), the Right of First
Refusal Closing Date shall not occur before all necessary approvals of any
Governmental Authority have been obtained, including without limitation
compliance with the HSR Act, if applicable. If any such approvals cannot be
obtained within the otherwise applicable time period for closing, the closing
shall occur as soon as practicable after all such approvals are obtained.
Failure by either party to close within the applicable period stated herein
(unless such failure is caused by the inability of such person, after diligent
effort, to obtain any necessary approvals from any Governmental Authority) shall
constitute a default entitling the non-defaulting party to such remedies as are
contained in this Agreement or as may be provided under applicable law. On the
Right of First Refusal Closing Date, the Buying Stockholder shall pay the Right
of First Refusal Purchase Price as follows: (A) 10% in cash by wire transfer of
immediately available funds to an account designated by the Selling Stockholder,
and (B) 90% by delivery of the Buying Stockholder's promissory note bearing
interest at the prime rate charged by The Bank of New York from time to time,
compounded quarterly, with all principal and accrued interest being due and
payable on the date that is six months after the Right of First Refusal Closing
Date, which note shall be prepayable without penalty and shall be secured by a
first priority security interest in the Selling Stockholder's Stock.
4. Preemptive Rights. If ResNet issues any additional shares of its capital
-----------------
stock (including by sale of treasury stock), each Stockholder shall have the
preemptive and preferential right, in proportion to its percentage ownership of
the capital stock of ResNet immediately prior to such issuance, to purchase and
subscribe for additional shares of the capital stock of ResNet, upon the same
terms and conditions as any such new issuance of capital stock of ResNet, such
that each Stockholder will have immediately after such stock issuance, the same
percentage ownership of the capital stock of ResNet as such Stockholder had
immediately prior to such stock issuance; provided, however, that LodgeNet shall
have no preemptive rights with respect to the Initial Stock or any Conversion
Stock, Reconciliation Stock, or Option Stock to be issued to TCI-Satellite and
provided further that for purposes of determining percentage ownership of each
of the Stockholders in the capital stock of ResNet, all of the Initial Stock and
the Conversion Stock shall be deemed to be owned by TCI-Satellite and all of the
Reconciliation Stock and Option Stock shall be deemed to be owned by TCI-
Satellite if it has been issued and, if or to the extent that it has not been
issued, all of the Reconciliation Stock and Option Stock shall be deemed to be
owned by TCI-Satellite until such time as the Option Agreement and the Option
Warrant shall have terminated without issuance of the Option Stock. If TCI-
Satellite is prevented from exercising its preemptive rights to acquire
additional shares of capital stock of ResNet due to the Regulatory Restrictions,
upon payment of the purchase price for such shares ResNet shall issue such
shares into an escrow or voting trust that, in the opinion of regulatory counsel
reasonably acceptable to ResNet, would not violate the Regulatory Restrictions,
-9-
<PAGE>
or upon TCI-Satellite loaning the amount of the purchase price for such shares
to ResNet on a non-recourse basis ResNet shall issue a warrant to acquire such
shares, in form and substance reasonably satisfactory to ResNet and TCI-
Satellite, to TCI-Satellite, at the option of TCI-Satellite. If any issuance of
capital stock of ResNet is on varying terms, the preemptive rights of the
Stockholders hereunder shall be at the most favorable price and on the most
favorable terms applicable to any purchaser of any such additional shares of
capital stock of ResNet. If the consideration paid by a purchaser is not cash
or cash equivalents, then the price paid by such purchaser will be deemed to be
the fair market value of such consideration. The Stockholders' preemptive right
to acquire additional shares of capital stock of ResNet shall extend, without
limitation, to shares issued pursuant to any options, warrants, debentures, or
debt convertible into common stock of ResNet (which in the case of debt or
debentures coupled with warrants will be considered as a unit for purposes of
exercise of any preemptive rights), to shares issued for property or services,
and to shares issued pursuant to any stock option, bonus, or other incentive
plan for the benefit of any of the directors, officers, or employees of ResNet.
5. Stockholder Rights.
------------------
(a) ResNet shall cause to be delivered to each Stockholder the
financial statements listed below, prepared, in each case, in accordance with
generally accepted accounting principles consistently applied with prior
periods, and such other reports as any Stockholder may reasonably request from
time to time. Such financial statements shall be accompanied by an analysis, in
reasonable detail, of the variance between the financial condition and results
of operations reported therein and the corresponding amounts for the applicable
period or periods in the annual budget for ResNet. The monthly and quarterly
financial statements referred to in (ii) and (iii) below may be subject to
normal year-end audit adjustments.
(i) As soon as practicable following the end of each fiscal year
(and in any event not later than 90 days after the end of such fiscal year), an
audited balance sheet of ResNet as of the end of such fiscal year and the
related statements of operations, stockholders' equity, and cash flows for such
fiscal year, together with appropriate notes to such financial statements and
supporting schedules, all of which shall be certified by certified public
accountants selected by ResNet, and in each case setting forth in comparative
form the corresponding figures for the immediately preceding fiscal year (in the
case of each balance sheet following the end of the second fiscal year of
ResNet) and the two immediately preceding fiscal years (in the case of each
statement of operations following the end of the third fiscal year of ResNet).
(ii) As soon as practicable following the end of each fiscal
quarter (and in any event not later than 45 days after the end of such fiscal
quarter), a balance sheet of ResNet as of the end of such fiscal quarter and the
related statements of operations, stockholders' equity, and cash flows for such
fiscal quarter and for the fiscal year to date, in each case setting forth in
comparative form the corresponding figures for the prior year's fiscal quarter
and interim period corresponding to the fiscal quarter and interim period just
completed.
<PAGE>
(iii) As soon as practicable following the end of each calendar
month (and in any event not later than 30 days after the end of such calendar
month), statements of operations for the interim period through such month and
the monthly period then ended.
(b) Any Stockholder shall have the right, from time to time but no
more often than once each calendar month, to request a special meeting of the
Stockholders by means of a written notice, together with a proposed agenda,
which notice must be given no less than 10 days prior to the date of such
special meeting. Except in the case of an emergency, no meeting of the
Stockholders may be called without the required advance notice and the proposed
agenda. Any Stockholders may participate in any such meeting by means of
telephonic or other communications equipment pursuant to which all Stockholders
can hear one another.
6. Representations and Warranties of TCI-Satellite.
-----------------------------------------------
TCI-Satellite represents and warrants to LodgeNet and ResNet that:
(a) It (i) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and (ii) has all
corporate powers required to carry on its business as conducted on the date
hereof with such exceptions as would not materially and adversely affect its
ability to perform its obligations under this Agreement.
(b) The execution, delivery and performance by it of this Agreement
are within its corporate powers and have been duly authorized by all necessary
corporate action on its part.
(c) This Agreement has been duly executed and delivered by it and
constitutes its valid and binding obligation, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or by the principles governing the availability of
equitable remedies.
7. Representations and Warranties of LodgeNet.
------------------------------------------
LodgeNet represents and warrants to TCI-Satellite and ResNet that:
(a) It (i) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and (ii) has all
corporate powers required to carry on its business as conducted on the date
hereof with such exceptions as would not materially and adversely affect its
ability to perform its obligations under this Agreement.
(b) The execution, delivery, and performance by it of this Agreement
are within its corporate powers and have been duly authorized by all necessary
corporate action on its part.
-11-
<PAGE>
(c) This Agreement has been duly executed and delivered by it and
constitutes its valid and binding obligation, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or by the principles governing the availability of
equitable remedies.
8. Representations and Warranties of ResNet.
----------------------------------------
ResNet represents and warrants to TCI-Satellite and LodgeNet that:
(a) It (i) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and (ii) has all
corporate powers required to carry on its business as conducted on the date
hereof with such exceptions as would not materially and adversely affect its
ability to perform its obligations under this Agreement.
(b) The execution, delivery, and performance by it of this Agreement
are within its corporate powers and have been duly authorized by all necessary
corporate action on its part.
(c) This Agreement has been duly executed and delivered by it and
constitutes its valid and binding obligation, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or by the principles governing the availability of
equitable remedies.
9. Further Assurances. From time to time during the term of this
------------------
Agreement and without further consideration, the Stockholders will execute and
deliver, or arrange for the execution and delivery of, such other documents and
take or arrange for such other actions as may reasonably be requested to
complete more effectively the agreements contemplated by this Agreement.
10. Termination of Agreement. This Agreement shall terminate upon the first
------------------------
to occur of the following events:
(a) merger or consolidation of ResNet, but only if ResNet is not the
surviving corporation as a result of such merger or consolidation or the
Stockholders do not hold a majority of the voting securities of the surviving
corporation as a result of such merger or consolidation;
(b) the date on which the Stock is publicly traded; or
(c) the unanimous written consent of the Stockholders.
11. Media Releases. Except for any announcement intended solely for the
--------------
internal distribution of TCI-Satellite, LodgeNet, or ResNet, or any disclosure
required by legal, accounting, or regulatory requirements (as to which the
limitations of Section 12(ii) below shall apply), all media releases
-12-
<PAGE>
(including but not limited to promotional or marketing material) by TCI-
Satellite, LodgeNet, or ResNet, or the respective employees or agents of any of
them, which identify TCI-Satellite, LodgeNet, or ResNet in the context of the
Transaction Documents shall be coordinated with and approved in writing by TCI-
Satellite, LodgeNet, and ResNet prior to the release thereof. Such approvals
shall not be unreasonably withheld or delayed. ResNet and TCI-Satellite may
state, without prior approval, in their promotional and advertising material
that the equipment being sold pursuant to the Equipment Sale Agreement and that
the distribution of programming services being provided pursuant to the Signal
Availability Agreement included in the Transaction Documents are being provided
to ResNet by TCI-Satellite.
12. Confidentiality. ResNet and each Stockholder agree that all terms and
---------------
conditions of this Agreement and all Proprietary Information (as defined herein)
furnished to ResNet by a Stockholder or to a Stockholder by the other
Stockholder or by ResNet shall be: (a) held in trust and confidence for the
disclosing Person; (b) used only in performance of the Transaction Documents;
(c) not copied (unless required for performance of the Transaction Documents)
without permission of the disclosing Person; and (d) not disclosed to anyone
other than Persons (including shareholders, directors, officers, employees or
agents of a Stockholder or of any Person affiliated with a Stockholder) who have
agreed to hold the Proprietary Information in trust and confidence in accordance
with the terms of this Section 12 and who have need to use such Proprietary
Information for the purposes of the Transaction Documents. "Proprietary
Information" means any ideas, plans or information, including, without
limitation, information of a technological or business nature (including,
without limitation, all trade secrets, technology, intellectual property, data,
summaries, reports, or mailing lists, whether written or oral and, if written,
however produced or reproduced) which is received by the receiving Person or
otherwise disclosed to the receiving Person from or by the disclosing Person,
that is marked as confidential or proprietary or bears a marking of like import,
or that the disclosing Person states is to be considered proprietary or
confidential, or that would logically be considered proprietary or confidential
under the circumstances of its disclosure. Information will not be deemed to be
Proprietary Information and the receiving Person shall have no obligation with
respect thereto, to the extent such information (i) is approved by prior written
authorization of the disclosing Person for release by the receiving Person; (ii)
is disclosed in order to comply with a judicial order issued by a court of
competent jurisdiction or with government laws or regulations, in which event
the receiving Person shall give prior written notice to the disclosing Person of
such disclosure as soon as practicable and shall cooperate with the disclosing
Person in using all reasonable efforts to obtain an appropriate protective order
or equivalent, provided, that the information shall continue to be Proprietary
Information to the extent it is covered by such protective order or equivalent;
(iii) becomes generally available to the public through any means other than a
breach by the receiving Person of its obligations under this Agreement; (iv) was
in the possession of the receiving Person without obligation of confidentiality
prior to receipt or disclosure as Proprietary Information as evidenced by
written records made prior to such receipt or disclosure; or (v) is developed
independently by the receiving Person (verified by written records maintained in
the ordinary course of business) without use of or benefit from the Proprietary
Information. Notwithstanding the foregoing, any information furnished to a
Stockholder by the other Stockholder or by ResNet prior to the date of this
Agreement that was covered by and subject to the terms of the Confidentiality
-13-
<PAGE>
Agreement dated March, 1996, shall remain subject to the terms thereof. The
restrictions contained in this Section 12 shall continue in full force and
effect and shall survive any termination of this Agreement or the sale by any
Stockholder of its Stock in ResNet for a period of two years.
13. Agreement Regarding Restructuring.
---------------------------------
(a) ResNet and the Stockholders acknowledge and agree that,
notwithstanding the fact that the Initial Stock being issued to TCI-Satellite
pursuant to the Subscription Agreement simultaneously with the execution of this
Agreement and the Conversion Stock and Reconciliation Stock issuable to TCI-
Satellite pursuant to the conversion rights under the Loan Agreement or the
Conversion Warrant is delineated as "common stock" of the same class as the
Stock owned by LodgeNet, ResNet, LodgeNet, and TCI-Satellite intend that the
Stock issued or issuable to TCI-Satellite as Initial Stock, Conversion Stock,
and Reconciliation Stock shall be entitled to receive in the aggregate a
preferential return of $40 million representing the investment by TCI-Satellite
in the Initial Stock, Conversion Stock, and Reconciliation Stock, determined on
a per share basis, in the form of a dividend upon a sale of all or substantially
all of the assets of ResNet or, if not previously paid in the form of such a
dividend, as a distribution upon a liquidation of ResNet, after payment of any
debt, including intercompany debt, of ResNet but prior to any other distribution
to the Stockholders in respect of their Stock. In order to effect the intent of
the parties described in the preceding sentence, ResNet, LodgeNet, and TCI-
Satellite agree to cause ResNet to amend its certificate of incorporation, in a
form mutually agreed to by LodgeNet and TCI-Satellite, to cause the
recapitalization of ResNet into Class A common stock and Class B common stock as
soon as practicable and in no event later than 30 days after the date of this
Agreement. The Class A common stock and Class B common stock shall have
identical rights, privileges, and interests, except that the Class B common
stock shall have the right to the preferential return described in the preceding
provisions of this Section 13. Immediately upon the recapitalization of ResNet,
the Stock held by LodgeNet shall be exchanged for Class A common stock and the
Stock held by TCI-Satellite shall be exchanged for Class B common stock.
(b) Simultaneously with effecting the recapitalization of ResNet,
ResNet, LodgeNet, and TCI agree to execute and deliver amended and restated
versions of the Transaction Documents that have been amended as appropriate to
reflect the recapitalization of ResNet, including, without limitation, the
addition of the preferential return associated with the Class B common stock in
determining the consideration to be paid for the Stock of TCI-Satellite if TCI-
Satellite is the Selling Stockholder pursuant to the Right of First Negotiation
under Section 3(a) of this Agreement. ResNet, LodgeNet, and TCI-Satellite agree
to negotiate in good faith and without delay to effect the recapitalization of
ResNet and appropriate amendments to the Transaction Documents. If, however,
such actions are not taken within 30 days after the date of this Agreement, TCI-
Satellite will have a unilateral right to rescind the transactions contemplated
by the Transaction Documents by written notice to ResNet, and ResNet agrees that
it will immediately refund to TCI-Satellite the sum of $5,396,053, plus interest
at the prime rate charged by The Bank of New York from and including the date of
this Agreement to but not including the date of such payment by ResNet to TCI-
Satellite, and the shares of Initial Stock shall be simultaneously canceled.
TCI-Satellite shall have no obligation to
-14-
<PAGE>
honor any purchase order for Equipment under the Equipment Sale Agreement,
including the Initial Purchase Order thereunder, until the recapitalization of
ResNet and related actions described in this Section 13 are completed.
(c) In connection with the negotiation regarding the recapitalization
of ResNet and related amendments to the Transaction Documents described in the
preceding provisions of this Section 13, ResNet, LodgeNet, and TCI-Satellite
further agree to negotiate in good faith and without delay regarding whether an
alternative structure would be more tax efficient than a recapitalization of
ResNet while maintaining the economic terms contained in the Transaction
Documents as they would be amended to take into account the proposed
recapitalization of ResNet as described in the preceding provisions of this
Section 13 and to obtain the acknowledgement of LodgeNet's senior lender that
the Borrower Bank Guaranty (as defined in the Loan Agreement) will not be
amended to extend the liability of ResNet beyond the LodgeNet Debt (as defined
in the Loan Agreement) without the consent of TCI Satellite.
14. Agreement Regarding Amendment of Bylaws. If at any time the
---------------------------------------
Stockholders each own 50% of the issued and outstanding common stock of ResNet,
ResNet and the Stockholders agree that ResNet's bylaws will be amended to
provide that each of the Stockholders has the right to elect an equal number of
members of ResNet's board of directors.
15. Miscellaneous.
-------------
(a) Upon execution of this Agreement, all certificates for shares of
the Stock owned by the Stockholders shall be returned to ResNet for endorsement
with the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SAID ACT. THE SECURITIES REPRESENTED BY
THIS CERTIFICATE ALSO ARE SUBJECT TO RESTRICTIONS ON TRANSFER
CONTAINED IN A STOCKHOLDERS' AGREEMENT DATED AS OF OCTOBER 21,
1996, A COPY OF WHICH IS ON FILE AND AVAILABLE FOR INSPECTION
DURING NORMAL BUSINESS HOURS AT THE PRINCIPAL OFFICE OF THE
CORPORATION, AND ANY ATTEMPTED TRANSFER IN VIOLATION OF THE TERMS
OF SUCH STOCKHOLDERS' AGREEMENT IS VOID .
After the Stock certificates are so endorsed, they shall be returned to the
Stockholders. All certificates of Stock which are issued or reissued during the
term of this Agreement shall bear the same endorsement.
-15-
<PAGE>
(b) Except as expressly set forth herein, the fees and expenses (including
the fees of any lawyers, accountants, investment bankers or others engaged by
any Person) in connection with this Agreement will be paid by the Person
incurring the same.
(c) All documentation, notices, reports and correspondence under this
Agreement shall be submitted and maintained in the English language. As used
herein, the singular shall include the plural and the plural may refer to only
the singular. The use of any gender shall be applicable to all genders. The
captions contained herein are for purpose of convenience only and are not part
of the Agreement. Unless otherwise specified, all references to Sections and
Exhibits in this Agreement are references to Sections of, and Exhibits to, this
Agreement.
(d) If any portion or portions of this Agreement shall be deemed, for any
reason, invalid or unenforceable, the remaining portion or portions shall
nevertheless be valid, enforceable, and in effect, unless such remaining portion
or portions are not reasonably adequate to accomplish the basic purposes and
intent of the parties. The parties will negotiate in good faith to replace any
invalid or unenforceable provision of this Agreement with an enforceable
provision that accomplishes the original intent of the parties to the extent
reasonably practicable.
(e) This Agreement cannot be amended except by a written instrument signed
by both Stockholders and ResNet.
(f) Either party's failure to enforce any provision of this Agreement shall
not in any way be construed as a waiver of any such provision as to any future
violations thereof, or prevent that party thereafter from enforcing each and
every other provision of this Agreement. No waiver of any right or remedy
hereunder shall be effective unless contained in a writing signed by the waiving
party. The rights granted to the parties herein are cumulative and the waiver by
a party of any single remedy shall not constitute a waiver of such party's right
to assert all other legal remedies available to it under the circumstances.
(g) Termination or expiration of this Agreement for any reason shall not
release either party from any liabilities or obligations set forth in this
Agreement which the parties have expressly agreed shall survive any termination
or expiration, or remain to be performed or by their nature would be intended to
be applicable following any such termination or expiration.
(h) This Agreement shall be governed and interpreted by the laws of the
State of Delaware, without regard to its conflict of law rules. The parties
agree that all litigation relating to this Agreement shall be brought in the
state and federal courts of appropriate subject matter jurisdiction in Delaware
and each party hereby submits itself to the non-exclusive in personam
jurisdiction of such courts for purposes of any such litigation. Neither party
shall object to venue in such courts on the grounds of an inconvenient forum or
otherwise. In the event of any litigation between the parties relating to this
Agreement, the prevailing party shall be entitled to recover, in addition to any
other relief awarded by the court, its reasonable attorneys fees and all other
costs of preparing for and participating in the litigation, including all
appeals.
-16-
<PAGE>
(i) Neither party will be in default or otherwise liable for any delay in
or failure of its performance under this Agreement where such delay or failure
arises by reason of any act of God, acts of the common enemy, the elements,
earthquake, floods, fires, epidemics, quarantine restrictions, riots, strikes,
failure or delay in transportation, freight embargoes or other causes beyond its
control.
(j) This Agreement, together with any exhibits, schedules, appendices, and
other attachments, expresses the understanding of the parties hereto and
supersedes all prior agreements, whether oral or written, relating to the
subject matters specifically expressed herein; provided, however, that the
parties acknowledge that simultaneously with the execution of this Agreement
they or their Affiliates are entering into the Loan Agreement, the Subscription
Agreement, the Option Agreement, an Equipment Sale Agreement, a Signal
Availability Agreement, and a Standstill Agreement, which documents are related
to this Agreement in that they collectively document a transaction between the
parties of which this Agreement is a part (collectively, the "Transaction
Documents").
(k) This Agreement may be executed in any number of counterparts each of
which shall be an original with the same effect as if the signatures thereof and
hereto were upon the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
RESNET COMMUNICATIONS, INC. TCI SATELLITE ENTERTAINMENT,
INC.
By: By:
--------------------------- ---------------------------
Name: Name:
------------------------- -------------------------
Title: Title:
------------------------ ------------------------
LODGENET ENTERTAINMENT
CORPORATION
By:
---------------------------
Name:
-------------------------
Title:
------------------------
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<PAGE>
EXHIBIT 10.17
SUBSCRIPTION AGREEMENT
BETWEEN
RESNET COMMUNICATIONS, INC.
AND
TCI SATELLITE ENTERTAINMENT, INC.
Dated as of October 21, 1996
<PAGE>
EXECUTION COPY
SUBSCRIPTION AGREEMENT
----------------------
This SUBSCRIPTION AGREEMENT (this "Agreement") is entered into as of
October 21, 1996, by and between ResNet Communications, Inc., a Delaware
corporation ("ResNet"), and TCI Satellite Entertainment, Inc., a Delaware
corporation ("TCI-Satellite") (each of TCI-Satellite and ResNet being referred
to herein individually as a "Party" and together as the "Parties").
RECITALS
--------
A. TCI-Satellite wishes to subscribe for and purchase from ResNet,
and ResNet desires to issue and sell to TCI-Satellite 52,520 shares of common
stock of ResNet, which shares represent, immediately after such issuance, 4.99%
of the issued and outstanding common stock of ResNet.
AGREEMENT
---------
For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the Parties hereby agree as follows:
1. Definitions.
-----------
For purposes of this Agreement, the following terms shall have the
following meanings:
"Affiliate" of any Person at any time shall mean any other Person
---------
directly or indirectly controlling, controlled by or under common control with
such Person at such time; with "control" for such purposes meaning ownership of
securities representing at least 75% of the economic interests in and 75% of the
voting power of a Person.
"Agreement" shall mean this Subscription Agreement, including any
---------
exhibits and attachments hereto, as amended from time to time.
"Assets" shall have the meaning specified in Section 4(n).
------
"Certificate" shall have the meaning specified in Section 2(b).
-----------
"Equipment" shall mean the equipment to be purchased by ResNet from
---------
TCI-Satellite pursuant to the Equipment Agreement.
"Equipment Agreement" shall mean an Equipment Sale Agreement pursuant
-------------------
to which TCI-Satellite shall agree to sell Equipment to ResNet, which shall be
executed and delivered on the date of and simultaneously with the execution of
this Agreement.
<PAGE>
"Financial Statements" shall have the meaning specified in
--------------------
Section 4(l).
"GAAP" shall mean generally accepted accounting principles as in
----
effect from time to time in the United States applied on a consistent basis.
"Governmental Authority" shall mean any federal, state, municipal or
----------------------
local governmental authority or political subdivision thereof.
"Initial Purchase Order" shall mean a purchase order pursuant to which
----------------------
ResNet will purchase Equipment from TCI-Satellite under the Equipment Agreement
for a purchase price of $5,396,053, payable in cash, which shall be delivered by
ResNet to TCI-Satellite on the date of and simultaneously with the execution of
this Agreement.
"Investment Company Act" shall mean the Investment Company Act of
----------------------
1940, as amended, and the rules and regulations thereunder as in effect from
time to time.
"Legal Requirements" shall mean the requirements of any law,
------------------
ordinance, statute, rule, regulation, code, order, judgment, decree, injunction,
franchise, determination, approval, permit, license, authorization or other
requirement of any Governmental Authority.
"Lien" shall mean any mortgage, lien, pledge, charge, claim, security
----
interest or encumbrance of any kind.
"Loan Agreement" shall mean a Subordinated Convertible Term Loan
--------------
Agreement between ResNet, as borrower, and TCI-Satellite, as lender, in the
principal amount of $34,603,947, which shall be executed and delivered on the
date of and simultaneously with the execution of this Agreement.
"LodgeNet" shall mean LodgeNet Entertainment Corporation, a Delaware
--------
corporation, and any successor corporation.
"Material Adverse Effect" shall mean a material adverse effect on the
-----------------------
business, assets, operations, or financial condition of a Party.
"1933 Act" shall mean the Securities Act of 1933, as amended, and the
--------
rules and regulations thereunder as in effect from time to time.
"Parties" and "Party" shall have the meanings specified in the
------- -----
Preamble.
"Permitted Liens" shall mean (a) Liens for taxes, assessments and
---------------
governmental charges not yet due and payable, (b) zoning laws and ordinances and
similar Legal Requirements, (c) rights reserved to any Governmental Authority to
regulate the affected property, and (d) as to any real property, any Liens which
are reflected in the public records and which do not individually or in the
-2-
<PAGE>
aggregate interfere with the right or ability to own, use or operate the
property as it is currently being used or operated or to convey good, marketable
and indefeasible title to the same; provided that "Permitted Liens" will not
include any Lien which could prevent or inhibit in any material way the conduct
of the business of ResNet as it is currently being conducted.
"Person" shall mean and include an individual, a corporation, a
------
partnership (general, limited or limited liability), a joint venture, a limited
liability company, an association, a trust or any other organization or entity,
including a Governmental Authority.
"Purchase Price" shall have the meaning specified in Section 2(a).
--------------
"ResNet" shall have the meaning specified in the Preamble.
------
"Shares" shall have the meaning specified in Section 2(a).
------
"TCI-Satellite" shall have the meaning specified in the Preamble.
-------------
"Transaction Documents" shall mean the Equipment Agreement, the Loan
---------------------
Agreement, an Option Agreement, a Signal Availability Agreement, a Stockholders'
Agreement, and a Standstill Agreement to be entered into by and between TCI-
Satellite and either ResNet or LodgeNet on the date of and simultaneously with
the execution of this Agreement.
2. Subscription and Purchase of Stock.
----------------------------------
(a) Subscription, Issuance, Purchase and Sale of Stock. Upon the
--------------------------------------------------
terms and subject to the conditions set forth in this Agreement, TCI-Satellite
hereby subscribes for and purchases, and ResNet hereby sells and issues to TCI-
Satellite, 52,520 shares of the common stock of ResNet (the "Shares") for a
purchase price of $5,396,053 (the "Purchase Price"). The Shares shall
represent, immediately after their issuance, 4.99% of the issued and outstanding
common stock of ResNet.
(b) Payment of Purchase Price; Issuance of Shares. The Purchase Price
---------------------------------------------
shall be payable on the date of this Agreement by wire transfer of immediately
available funds to an account that has been designated by written notice by
ResNet to TCI-Satellite. Upon receipt of the Purchase Price, on the date of
this Agreement ResNet shall issue and deliver a certificate (the "Certificate")
in the name of TCI-Satellite for the Shares and the Parties will execute and
deliver a cross-receipt for the Purchase Price and the Shares.
3. Representations and Warranties of TCI-Satellite.
-----------------------------------------------
TCI-Satellite represents and warrants to ResNet that:
(a) It (i) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, (ii) is authorized to
transact business and is in good standing in each
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<PAGE>
state in which its ownership of assets or conduct of business requires such
qualification, and (iii) has all corporate powers required to carry on its
business as conducted on the date hereof and as proposed to be conducted, with
such exceptions to clauses (ii) and (iii) as would not have a material adverse
effect on the ability of TCI-Satellite to perform its obligations under this
Agreement or under the Transaction Documents.
(b) The execution, delivery and performance by it of this Agreement
and the Transaction Documents are within its corporate powers and have been duly
authorized by all necessary corporate action on its part. Each Person executing
this Agreement and the Transaction Documents on behalf of TCI-Satellite is fully
authorized to execute and deliver the same.
(c) The execution, delivery and performance by it of this Agreement
and the Transaction Documents require no material action by or in respect of, or
filing with, any Governmental Authority other than those that have been obtained
or made and are in full force and effect.
(d) No consent by any Person under any contract to which it is a party
or to which its assets are subject is required or necessary for the execution,
delivery and performance by it of this Agreement and the Transaction Documents,
with such exceptions as would not have a material adverse effect on the ability
of TCI-Satellite to perform its obligations under this Agreement or under the
Transaction Documents.
(e) The execution, delivery and performance by it of this Agreement
and the Transaction Documents do not and will not (x) contravene its certificate
of incorporation or bylaws or (y) result in or constitute a breach or default
(including any event that, with the passage of time or giving of notice, or
both, would become a breach or default) under any applicable Legal Requirement
or any judgment, order, decree, contract, license, lease, indenture, mortgage,
loan agreement, note, security agreement or other agreement or instrument to
which it is a party or by which any of its properties may be bound, the effect
of which would be to cause a material adverse effect on the ability of TCI-
Satellite to perform its obligations under this Agreement or under the
Transaction Documents.
(f) This Agreement has been duly executed and delivered by it and
constitutes its valid and binding obligation, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or by the principles governing the availability of
equitable remedies.
(g) There is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of
TCI-Satellite or any of its Affiliates who might be entitled to any fee or
commission from ResNet or any of its Affiliates in connection with the
execution, delivery and performance of this Agreement or the Transaction
Documents.
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<PAGE>
(h) TCI-Satellite is acquiring the Shares for its own account, not as
a nominee or agent, for investment purposes only and not with a view to or for
the resale, distribution or fractionalization thereof, in whole or in part.
(i) TCI-Satellite acknowledges that the offer and sale of the Shares
to it has not been accomplished by any form of general solicitation or general
advertising, including, but not limited to, any advertisement, article, notice
or other communication published in any newspaper, magazine or similar media, or
broadcast over television or radio and any seminar or meeting whose attendees
have been invited by any general solicitation or general advertising.
(j) TCI-Satellite acknowledges its understanding that the offering and
sale of the Shares is intended to be exempt from registration under the 1993 Act
by virtue of section 4(2) of the 1933 Act and the provisions of Rule 506 of
Regulation D promulgated thereunder. In furtherance thereof, TCI-Satellite
acknowledges that:
(i) It has the financial ability to bear the economic risk of
its investment in the Shares (including its possible loss), has
adequate means for providing for its current needs and contingencies
and has no need for liquidity with respect to its investment in the
Shares;
(ii) It has such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks
of an investment in the Shares and protecting its own interests in
connection with the investment and has obtained, in its judgment,
sufficient information from ResNet to evaluate the merits and risks of
an investment in the Shares, and it has not utilized any Person as its
purchaser representative in connection with evaluating such merits and
risks; and
(iii) It is an "accredited investor" within the meaning of
Regulation D promulgated under the 1933 Act.
(k) TCI-Satellite acknowledges that:
(i) It has been furnished any documents it has requested, has
carefully read any such documents and understands and has evaluated
the risks of a purchase of the Shares, and has relied solely (except
as indicated in subsections (ii) and (iii) below) on the information
contained in any such documents;
(ii) It has been provided an opportunity to obtain any
additional information concerning the Shares and ResNet;
(iii) It has been given the opportunity to ask questions of,
and receive answers from, representatives of ResNet concerning the
terms and conditions of this subscription and other matters pertaining
to this investment, and has been given the opportunity to obtain such
additional information necessary to verify the accuracy of the
information which was provided
-5-
<PAGE>
in order for it to evaluate the merits and risks of an investment in
the Shares to the extent ResNet possesses such information or can
acquire it without unreasonable effort or expense, and has not been
furnished any other offering literature or prospectus except as
mentioned herein; and
(iv) It has determined that the Shares are a suitable investment
for it and that at this time it could bear a complete loss of its
investment.
(l) TCI-Satellite agrees that it will not sell or otherwise transfer
the Shares without registration under the 1993 Act or an exemption therefrom,
and fully understands and agrees that it must bear the economic risk of its
investment for an indefinite period of time because, among other reasons, the
Shares have not been registered under the 1993 Act or under the securities laws
of certain states and, therefore, cannot be resold, pledged, assigned or
otherwise disposed of unless the Shares are subsequently registered under the
1933 Act and under the applicable securities laws of such states or an exemption
from such registration is available. TCI-Satellite understands that ResNet is
under no obligation to register the Shares on its behalf or to assist it in
complying with any exemption from registration under the 1933 Act or any
applicable state securities laws. TCI-Satellite also understands that sales or
transfers of the Shares are further restricted by the provisions of the
Stockholders' Agreement included in the Transaction Documents.
(m) There are no suits, claims, grievances, actions, proceedings, or
governmental investigations pending or, to the best knowledge of TCI-Satellite,
threatened against or affecting TCI-Satellite which (i) seek to restrain or
enjoin the consummation of the transactions contemplated by this Agreement or
the Transaction Documents or (ii) might have a material adverse effect on the
ability of TCI-Satellite to perform its obligations under this Agreement or
under the Transaction Documents. TCI-Satellite is not in violation of any term
of any judgment, decree, injunction, or order to which it is subject, which
violation could have a material adverse effect on the ability of TCI-Satellite
to perform its obligations under this Agreement or under the Transaction
Documents.
4. Representations and Warranties of ResNet.
----------------------------------------
ResNet represents and warrants to TCI-Satellite that:
(a) It (i) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, (ii) is authorized to
transact business and is in good standing in each state in which its ownership
of assets or conduct of business requires such qualification, and (iii) has all
corporate powers required to carry on its business as conducted on the date
hereof and as proposed to be conducted, with such exceptions to clauses (ii) and
(iii) as would not have a Material Adverse Effect on ResNet or a material
adverse effect on the ability of ResNet to perform its obligations under this
Agreement or under the Transaction Documents.
(b) The execution, delivery, and performance by it of this Agreement
and the Transaction Documents are within its corporate powers and have been duly
authorized by all necessary corporate
-6-
<PAGE>
action on its part. Each Person executing this Agreement and the Transaction
Documents on behalf of ResNet is fully authorized to execute and deliver the
same.
(c) The execution, delivery and performance by it of this Agreement
and the Transaction Documents require no material action by or in respect of, or
material filing with, any Governmental Authority other than those that have been
obtained or made and are in full force and effect.
(d) No consent by any Person under any contract to which it or
LodgeNet is a party or to which their respective assets are subject is required
or necessary for the execution, delivery and performance by it of this Agreement
and the Transaction Documents, except those set forth on Schedule 4(d) all of
which have been obtained and are in full force and effect.
(e) The execution, delivery and performance by it of this Agreement
and the Transaction Documents do not and will not (x) contravene its certificate
of incorporation or bylaws or (y) result in or constitute a breach or default
(including any event that, with the passage of time or giving of notice, or
both, would become a breach or default) under any applicable Legal Requirement
or any judgment, injunction, order, decree, contract, license, lease, indenture,
mortgage, loan agreement, note or other agreement or instrument to which it is a
party or by which any of its properties may be bound, the effect of which would
be to cause a Material Adverse Effect on ResNet or a material adverse effect on
the ability of ResNet to perform its obligations under this Agreement or under
the Transaction Documents.
(f) This Agreement has been duly executed and delivered by it
constitutes its valid and binding obligation, enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or by the principles governing the availability of
equitable remedies.
(g) LodgeNet and ResNet are being represented in connection with the
transactions contemplated by the Transaction Documents by PaineWebber
Incorporated, and LodgeNet will be responsible for payment of all fees and
expenses in connection with such representation. There is no investment banker,
broker, finder or other intermediary which has been retained by or is authorized
to act on behalf of ResNet or any of its Affiliates who might be entitled to any
fee or commission from TCI-Satellite or any of its Affiliates in connection with
the execution, delivery and performance of this Agreement or the Transaction
Documents.
(h) The Shares, when paid for by and issued to TCI-Satellite in
accordance with the terms of this Agreement, will be duly and validly issued,
fully paid and nonassessable, and, after issuance of the Shares, will constitute
4.99% of the issued and outstanding shares of common stock of ResNet. Upon
issuance of the Shares, ResNet will deliver to TCI-Satellite good and valid
title to the Shares, free and clear of any Liens. The Shares are not being
issued in violation of, and are not subject to, any preemptive rights or other
similar rights. Assuming that the representations and warranties of TCI-
Satellite contained in Sections 3(h), (i), (j), (k), and (l) are true and
correct, when issued to TCI-Satellite in accordance with the provisions hereof,
the Shares will have been issued in accordance with
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the registration or qualification provisions of the 1933 Act and any relevant
state securities laws or pursuant to valid exemptions therefrom.
(i) The authorized capital stock of ResNet consists of 10,000,000
shares of common stock, par value $.01 per share, of which 1,000,000 shares are
issued and outstanding, and 5,000,000 shares of preferred stock of which no
shares are issued and outstanding. Immediately prior to issuance of the Shares
to TCI-Satellite hereunder, all of the shares of issued and outstanding capital
stock of ResNet are owned beneficially and of record by LodgeNet. There are no
outstanding or authorized (i) securities of ResNet convertible into or
exchangeable or exercisable for any shares of its capital stock, or (ii)
subscriptions, options, warrants, calls, rights, commitments, or other
agreements or obligations of any kind obligating ResNet to issue any additional
shares of its capital stock or any other securities convertible into or
evidencing the right to acquire or subscribe for any shares of its capital
stock. ResNet does not directly or indirectly own (beneficially or of record)
any stock or other ownership in or control any other entity.
(j) ResNet is not an "investment company" or a company "controlled" by
an investment company within the meaning of the Investment Company Act, and
ResNet has not relied on rule 3a-2 under the Investment Company Act as a means
of excluding it from the definition of an "investment company" under the
Investment Company Act at any time within the three year period preceding the
date of issuance of the Shares to TCI-Satellite hereunder.
(k) There are no suits, claims, grievances, actions, proceedings, or
governmental investigations pending or, to the best knowledge of ResNet or
LodgeNet, threatened against or affecting ResNet which (i) seek to restrain or
enjoin the consummation of the transactions contemplated by this Agreement or
(ii) might have a Material Adverse Effect on ResNet or a material adverse effect
on the ability of ResNet to perform its obligations under this Agreement or
under the Transaction Documents. ResNet is not in violation of any term of any
judgment, decree, injunction, or order to which it is subject, which violation
could have a Material Adverse Effect on ResNet or a material adverse effect on
the ability of ResNet to perform its obligations under this Agreement or under
the Transaction Documents.
(l) ResNet has delivered to TCI-Satellite correct and complete copies
of its unaudited balance sheet as of September 30, 1996, and the related
unaudited statement of income for the period from the date of incorporation of
ResNet through September 30, 1996 (collectively, the "Financial Statements").
The Financial Statements were prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby and fairly present
ResNet's financial position, results of operations and changes in financial
position as of the dates and for the periods indicated, subject in the case of
the unaudited Financial Statements only to normal year-end adjustments (none of
which will be material in amount) and the omission of footnotes. Except as
disclosed by, or reserved against in, its most recent balance sheet included in
the Financial Statements, ResNet did not have as of the date of such balance
sheet any liability or obligation, whether accrued, absolute, fixed or
contingent (including liabilities for taxes or unusual forward or long-term
commitments), which was or would be material to the business, results of
operations or financial condition of ResNet, nor
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to ResNet's best knowledge does any aspect of its business form a basis for any
claim by a third party which, if asserted, could result in a liability not
disclosed by or reserved against in such balance sheet in each case of a type
which would be required to be disclosed in such Financial Statements in
accordance with GAAP. Since the date of the balance sheet included in the
Financial Statements (i) ResNet's business has been operated only in the
ordinary course, (ii) ResNet has not sold or disposed of any assets other than
in the ordinary course of business, and (iii) there has been no Material Adverse
Effect on, and no event has occurred which is likely, individually or in the
aggregate, to result in any Material Adverse Effect on, ResNet or a material
adverse effect on the ability of ResNet to perform its obligations under this
Agreement or under the Transaction Documents.
(m) ResNet has duly and timely filed in proper form all income,
franchise, sales, use, property, excise, payroll and other tax returns and all
other reports (whether or not relating to taxes) required to be filed with the
appropriate Governmental Authority, except where the failure to make such
filings could not be reasonably expected to have a Material Adverse Effect on
ResNet or a material adverse effect on the ability of ResNet to perform its
obligations under this Agreement or under the Transaction Documents. All taxes,
fees and assessments of whatever nature due and payable by ResNet have been
paid, except such amounts as are being contested diligently and in good faith
and are not in the aggregate material. There are no outstanding agreements or
waivers extending the statutory period of limitations applicable to any federal,
state, local or foreign income tax return for any period, and there are no tax
audits pending.
(n) Schedule 4(n) contains a description of all material assets owned
by ResNet and all material contracts to which ResNet is a party or by which any
of its properties are bound (collectively, the "Assets"). Except as
specifically disclosed on Schedule 4(n), ResNet has good and marketable title to
all of the Assets, and the Assets are free and clear of all Liens other than
Permitted Liens. ResNet has no material assets of any kind other than the
Assets, and ResNet has no material liabilities, obligations, or commitments of
any kind other than obligations under the contracts described on Schedule 4(n)
and liabilities disclosed on the Financial Statements (except liabilities of a
type that would not be required to be disclosed in such Financial Statements in
accordance with GAAP).
5. Further Assurances. From time to time after the date hereof and
------------------
without further consideration, the Parties will execute and deliver, or arrange
for the execution and delivery of such other instruments of conveyance and
transfer or other instruments or documents and take or arrange for such other
actions as may reasonably be requested to complete more effectively the
transactions contemplated by this Agreement or the Transaction Documents, to
confirm the issuance to TCI-Satellite of the Shares as provided herein, and to
vest in TCI-Satellite all rights of a record owner of the Shares.
6. Conditions to the Obligations of TCI-Satellite.
----------------------------------------------
The obligation of TCI-Satellite to pay the Purchase Price is subject
to the prior satisfaction of each of the following conditions:
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<PAGE>
(a) All consents required to be obtained by ResNet in connection with
the transactions contemplated by this Agreement or the Transaction Documents
shall have been obtained and remain in full force and effect.
(b) No order, stay, judgment or decree shall have been issued by any
court and be in effect restraining or prohibiting the consummation of the
transactions contemplated by this Agreement or the Transaction Documents.
(c) ResNet shall simultaneously deliver to TCI-Satellite (i) the
Certificate, and (ii) the Initial Purchase Order.
(d) The Parties shall have executed and delivered the Transaction
Documents.
7. Conditions to the Obligations of ResNet.
---------------------------------------
The obligations of ResNet to be performed by ResNet hereunder on the
date hereof are subject to the satisfaction of each of the following conditions:
(a) All consents required to be obtained by TCI-Satellite in
connection with the transactions contemplated by this Agreement or the
Transaction Documents shall have been obtained and remain in full force and
effect.
(b) No order, stay, judgment or decree will have been issued by any
court and be in effect restraining or prohibiting the consummation of the
transactions contemplated by this Agreement or the Transaction Documents.
(c) TCI-Satellite shall have paid the Purchase Price to ResNet in the
manner specified in Section 2(b).
(d) The Parties shall have executed and delivered the Transaction
Documents.
8. Miscellaneous.
-------------
(a) The Certificate representing the Shares shall bear the following
legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SAID ACT. THE SECURITIES REPRESENTED BY
THIS CERTIFICATE ALSO ARE SUBJECT TO RESTRICTIONS ON TRANSFER
CONTAINED IN A STOCKHOLDERS' AGREEMENT DATED AS OF OCTOBER 21,
1996, A COPY OF WHICH IS ON FILE
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<PAGE>
AND AVAILABLE FOR INSPECTION DURING NORMAL BUSINESS HOURS AT THE
PRINCIPAL OFFICE OF THE CORPORATION, AND ANY ATTEMPTED TRANSFER IN
VIOLATION OF THE TERMS OF SUCH STOCKHOLDERS' AGREEMENT IS VOID.
(b) Except as expressly set forth herein, the fees and expenses (including
the fees of any lawyers, accountants, investment bankers or others engaged by a
Party) in connection with this Agreement and the transactions contemplated
hereby, whether or not the transactions contemplated hereby are consummated,
will be paid by the Party incurring the same.
(c) All documentation, notices, reports and correspondence under this
Agreement shall be submitted and maintained in the English language. As used
herein, the singular shall include the plural and the plural may refer to only
the singular. The use of any gender shall be applicable to all genders. The
captions contained herein are for purpose of convenience only and are not part
of the Agreement. Unless otherwise specified, all references to Sections and
Exhibits in this Agreement are references to Sections of, and Exhibits to, this
Agreement.
(d) If any portion or portions of this Agreement shall be deemed, for any
reason, invalid or unenforceable, the remaining portion or portions shall
nevertheless be valid, enforceable, and in effect, unless such remaining portion
or portions are not reasonably adequate to accomplish the basic purposes and
intent of the Parties. The Parties will negotiate in good faith to replace any
invalid or unenforceable provision of this Agreement with an enforceable
provision that accomplishes the original intent of the Parties to the extent
reasonably practicable.
(e) This Agreement cannot be amended except by a written instrument signed
by the Parties hereto.
(f) Either Party's failure to enforce any provision of this Agreement shall
not in any way be construed as a waiver of any such provision as to any future
violations thereof or prevent that Party thereafter from enforcing each and
every other provision of this Agreement. No waiver of any right or remedy
hereunder shall be effective unless contained in a writing signed by the waiving
Party. The rights granted to the Parties herein are cumulative and the waiver by
a Party of any single remedy shall not constitute a waiver of such Party's right
to assert all other legal remedies available to it under the circumstances.
(g) Termination or expiration of this Agreement for any reason shall not
release either Party from any liabilities or obligations set forth in this
Agreement which the Parties have expressly agreed shall survive any termination
or expiration, or remain to be performed or by their nature would be intended to
be applicable following any such termination or expiration.
(h) This Agreement shall be governed and interpreted by the laws of the
State of Delaware, without regard to its conflict of law rules. The Parties
agree that all litigation relating to this Agreement shall be brought in the
state and federal courts of appropriate subject matter
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<PAGE>
jurisdiction in Delaware, and each Party hereby submits itself to the non-
exclusive in personam jurisdiction of such courts for purposes of any such
litigation. Neither Party shall object to venue in such courts on the grounds
of an inconvenient forum or otherwise. In the event of any litigation between
the Parties relating to this Agreement, the prevailing Party shall be entitled
to recover, in addition to any other relief awarded by the court, its reasonable
attorneys fees and all other costs of preparing for and participating in the
litigation, including all appeals.
(i) Neither Party will be in default or otherwise liable for any delay in
or failure of its performance under this Agreement where such delay or failure
arises by reason of any act of God, acts of the common enemy, the elements,
earthquake, floods, fires, epidemics, quarantine restrictions, riots, strikes,
failure or delay in transportation, freight embargoes or other causes beyond its
control.
(j) This Agreement, together with any exhibits, schedules, appendices, and
other attachments, expresses the understanding of the Parties hereto and
supersedes all prior agreements, whether oral or written, relating to the
subject matters specifically expressed herein; provided, however, that the
Parties acknowledge that simultaneously with the execution of this Agreement
they or their Affiliates are entering into the Transaction Documents which are
related to this Agreement in that they collectively document a transaction
between the Parties of which this Agreement is a part.
(k) Neither Party may assign any of its rights or delegate any of its
duties hereunder without the prior written consent of the other Party; provided
that either Party may assign this entire Agreement to an Affiliate of such Party
or to a Person that acquires all or substantially all of the assets or business
of such Party if such Party gives prior written notice to the other Party and
delivers an assumption agreement of such assignee in form and substance
reasonably satisfactory to the other Party pursuant to which such assignee
assumes the obligations of the assigning Party under this Agreement. Each Party
agrees that it will cause any acquiror of all or substantially all of the assets
or business of such Party to assume this Agreement. Subject to the foregoing,
this Agreement shall be binding upon and shall inure to the benefit of the
Parties, their respective successors and permitted assigns. For purposes of
this paragraph, "assign" shall mean to directly or indirectly sell, assign,
convey, lease, sublease or permit the use of, in any manner, any rights or
obligations under this Agreement.
(l) This Agreement may be executed in any number of counterparts each of
which shall be an original with the same effect as if the signatures thereof and
hereto were upon the same instrument.
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IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
duly executed as of the date first above written.
RESNET COMMUNICATIONS, INC. TCI SATELLITE ENTERTAINMENT,
INC.
By: By:
---------------------------- ----------------------------
Name: Name:
-------------------------- --------------------------
Title: Title:
------------------------- -------------------------
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EXHIBIT 21.
LIST OF SUBSIDIARIES OF THE COMPANY
1. TCISE Partner 1, Inc.
2. TCISE Partner 2, Inc.
3. Tempo Satellite, Inc.
4. TCISE Canada, Inc.
